CPI dominates week ahead for the Aussie
The Australian dollar traded a tight range last week but markets will be on edge for the vital Australia Q1 CPI data on Wednesday, which will shape expectations for the RBA decision next week.
AUD/USD traded a very tight range last week of 0.6678 to 0.6772 and has now closed with either a 0.66 or 0.67 handle every day since 10 March.
Seemingly keeping a lid on rallies is market pricing for a Federal Reserve rate rise on 3 May solidifying above 80% probability. FOMC members began a pre-meeting media blackout on 22 April, ahead of which we heard from many of them. There was some variation in views but most reinforced the impression that another 25 basis point rate rise to 5.00-5.25% was the base case for next week’s decision.
This reinforced the US dollar as one of the highest-yielding major currencies, at least for the time being. Markets remain keen to price a policy reversal later in the year, with the Fed funds rate priced to be back under 4.40% by January 2024. The week’s second-tier US data was mixed. But more important in the week ahead, especially Q1 GDP and March personal income and spending, which includes the Fed’s preferred inflation measure, seen easing to 4.1%yr overall, 4.5%yr on the core measure.
Market pricing for the 2 May RBA policy decision has edged up over the past week, to about 35% chance of a 25bp hike to 3.85%. The minutes of the April meeting revealed that the Board considered a 25bp move before opting for a pause and that it is newly worried about both the pace of population growth through immigration and of “increased risk of larger wage increases in parts of the economy, including in the public sector, later in the year.”
But of course this pricing – and the Aussie dollar – could swing sharply if Australia’s Q1 CPI surprises the market. Westpac looks for consumer prices to have risen 1.4%qtr, 7.0%yr, moderating from Q4’s 1.9%qtr, 7.8%yr, the latter outcome producing a hawkish RBA response in February. As for core inflation, we expect the trimmed mean CPI to have risen 1.4%qtr, 6.7%yr, down only modestly from 6.9%yr in Q4 and still a long way above the 2-3% target range.
The A$ lost some commodity price support over the week. Benchmark iron ore futures prices dropped about -7% to $108/tonne as Chinese regulators warned against market manipulation and steel demand softened. Energy prices also faltered. The key Japan Korea liquefied natural gas price fell below $12 for the first time since December 2022 as traders focused on record inventories and rising nuclear restarts in Japan. Brent crude oil dropped -5.4% to $82/barrel, unwinding almost all the bounce in response to the surprise OPEC production cut on 2 April.
On the positive side though, China’s flurry of hard data leaned mostly stronger than expected, including Q1 GDP up 4.5%yr, March retail sales surging 10.6%yr and March industrial production growth of 3.9%yr. A number of forecasters raised their estimates of China’s 2023 economic growth.
AUD/NZD was the most notable Aussie cross last week. It rose above 1.0900 for the first time since 28 February. It has been trending higher for about 3 weeks, but gained momentum as New Zealand Q1 CPI came in a bit below expectations. Even so, markets still price the RBNZ cash rate to reach 5.50% by July.
Event risk
Germany Apr IFO business survey (Mon), Aust and NZ closed for ANZAC Day holiday, US Apr consumer confidence (Tue), Aust Q1 CPI (Wed), Aust Q1 export and import prices, US Q1 GDP (Thu), Aust Mar private credit and Q1 producer prices, Bank of Japan policy decision, Eurozone Q1 GDP, US Q1 employment cost index and Mar personal income and spending (Fri), China Labour Day holiday period begins (Sat-Wed) China Apr official manufacturing and services PMIs (Sun)
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