Back at the beginning of April, the Reserve Bank of Australia (RBA) made a subtle but significant change to its guidance as it emphasized setting monetary policy to support "sustainable growth in the economy."
On the surface, this might seem like a benign statement but similar language was used back in 2016. Subsequently, the RBA cut rates in May 2016 as well as in August of the same year and has been on hold ever since. While those two cuts were under a different RBA Governor, the current governor has stated that policy should be broader than a singular focus on meeting the 2-3% inflation target. The implication is that the bank could find justification in easing policy from a softening jobs market if inflation remains below target.
However, for the immediate future, the RBA is most likely on hold until after the Federal elections on May 18 to avoid politicizing monetary policy. Notably, while the Australian government experienced a revenue windfall over the past year, the current government decided to add to its projected budget surplus and pushed off large tax cuts and infrastructure spending towards the medium term.
As a result, the elections could be seen as a referendum on whether Australia prefers big tax cuts and infrastructure spending under the current government or more direct measures on wages under the opposition Labor party. Currently, polls are close, and the opposition party appears to currently have the advantage. Either way, the Australian economy will find itself in an enviable position. Not only does Australia hold the world record for the longest period of economic growth among developed economies, it has scope for monetary and fiscal support to reduce downside risks. | |
MAJOR CENTRAL BANK ACTIVITY THIS WEEK |
| 4/17 | South Korea | Expectations for rates to remain unchanged at 1.75% | | | | | |
KEY MARKET MOVING ECONOMIC RELEASES |
| 4/16 | Industrial Production | Expectations for 0.2% growth MoM | | | 4/18 | Retail Sales | Expectations for 0.9% growth MoM | | | 4/18 | PMI | Expectations for manufacturing and services PMI print of 52.8 and 55.0, respectively | | | | | |
| 4/17 | EZ CPI | Expectations for a gain of 1.0% MoM; 0.8% core gain MoM | | | 4/18 | EZ PMI | Expectations for a manufacturing, services and composite print of 48.0, 53.2 and 51.8, respectively | | | 4/16 | U.K. Unemployment Rate | Expectations for the rate to remain at 3.9% | | | 4/17 | U.K. CPI | Expectations for a gain of 0.2% MoM; 1.9% core gain MoM | | | | | |
Asia/Japan, and New Zealand |
| 4/16 | Chinese Industrial Production | Expectations for a gain of 6.0% YoY | | | 4/16 | China Q1 GDP | Expectations for 1.4% growth QoQ | | | 4/18 | Japan CPI | Expectations for gain of 0.5% YOY | | | | | |
| The EURUSD broke out to the top side, hitting its highest level for the month and breaking out of the tight range it was previously in. USD weakness, as well as positive EZ data, including a positive surprise from German data were the drivers of this move. While this week's data builds on the narrative that European data is bottoming, it's notable that the ECB didn't make mention to the marginally improving economic data at its last meeting, setting the stage for further easing if needed. On balance, the economic backdrop in the Eurozone is still on shaky ground and it will take a series of positive data surprises to convince the markets and the ECB of a creditable recovery. Until then, we remain neutral on the euro and expect further consolidation with headlines moving the single currency. | |
| After a period where Brexit-related headlines were coming out on a nearly constant basis, last week ended on an unusually quiet basis. Markets should enjoy this respite as it certainly won't last. PM May was granted a flexible extension until October 31 with a review in June. Officially, this date was set as it comes right before the new EC President takes over, but unofficially, it was seen as a compromise between French and German desires. As it stands, PM May has reiterated her goal of exiting by May 22 as to avoid EU parliamentary elections but little to no progress has been made and the EU stands firm on its refusal to reopen negotiations. Expect the GBP to continue to be moved by headlines with the risk of continuing political deadlock bringing the markets to Halloween in essentially the same state as it is in now. | |
| A rise in U.S. yields and positive news from U.S. – China trade talks combined to push USDJPY higher this week, with USDJPY hitting levels not seen since 2018. With global equity markets rising, Japanese investor demand for foreign assets remains strong, supporting JPY outflows. While U.S. rates have recovered, a consistently dovish Fed should put a cap on U.S. rates and JPY depreciation. Additionally, political tensions remain high in Washington and could weigh on market confidence and the USD. | |
| The CAD has been range trading since the beginning of the year and this continued last week as little meaningful data was released. Looking towards next week, the Bank of Canada's quarterly Business Outlook Survey will be a key data point. Given the weakening GDP picture and overall global slowdown during the survey period, it is likely that some economic softness will be reflected in the survey and keep the BoC on hold. Expect further range trading. | |
| The CNY has been benefiting from a number of fronts since the beginning of the year. The Chinese government and central bank have been using monetary and fiscal measures to provide stability and liquidity to their markets. Signs are emerging that the Chinese economy has started responding to this stimulus and that continued last week with strong exports gains as well as healthy lending/money supply numbers. Additionally, continued positive expectations surrounding a successful conclusion to the U.S. – China trade deal also spurred demand for the CNY. Over the past weeks, the CNY has consolidated its gains as the trade negotiations have dragged on; expect more sideways trading until more news is known about the trade negotiations. | |
Australia remains among the ranks of G10 countries with a central bank that has adopted a dovish turn. Market pricing currently holds a ~71% chance of a rate cut this year, but comments from officials have adopted more of a wait and see approach. As such, the markets will be looking at this week's release of the RBC meeting minutes for guidance on the bank's rate path. In the near term, the AUD has benefited from an uptick in Chinese economic data surprises and constructive trade talk headlines. On a political front, political risks come through PM Morrison's call for an election in May with polls showing an increased likelihood of power shifting to the left-leaning opposition Labor party. Bias for sideways movement driven by headlines until further clarity is gained on domestic consumption. |
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