RBA hike boosts Aussie but Fed meeting looms
The Aussie outperformed major currencies last week as the RBA rate hike outweighed a soft GDP report. The calendar for the week ahead is a minefield of event risk, including policy decisions by the Fed, ECB and BoJ, US May inflation data and Australia’s May employment report.
AUD/USD has trended higher over the past week, reaching 0.6773, a high since 11 May. The US dollar is somewhat softer against most major currencies over this time, but the Aussie is strongest in the G10 so far in June. Last week the sharpest gain in AUD/USD was a half cent rally in the minutes following the RBA decision.
The RBA raised the cash rate for the 12th time in the past 13 meetings, by 25 basis points to 4.1%. This decision was only forecast by 10 of 30 economists in the Bloomberg survey and was only 35% priced into money markets, sparking the sharp reaction. The statement revealed increased concern over medium-term inflation expectations and the increase in award wages, given the poor productivity trend.
RBA Governor Lowe followed the Board statement with a speech the next day where he elaborated on his inflation concerns and stressed that the RBA Board is “particularly attentive to the risk that inflation stays too high for too long.”
This speech was delivered just hours ahead of Australia’s Q1 GDP report, which didn’t exactly validate a more aggressive approach to monetary policy. The economy grew just 0.2%qtr (or -0.2% per capita), to be up 2.3%yr. The household saving ratio of 3.7% was the lowest since 2008 as interest paid on mortgages jumped a further 11.5% in the quarter. Markets placed a lot more weight on the RBA than on the weak economic data. Pricing for the peak RBA cash rate this cycle jumped from 4.22% on 5 June to 4.46% on 13 June.
The Australian dollar’s commodity price support has been mixed. On the positive side, Chinese markets seem to be pricing in a pickup in construction activity. The September Dalian iron ore contract jumped 22% from the 25 May low to the 9 June high, while spot iron ore rose $8 to $115/tonne last week before slipping to $111 on Monday. But the LME base metals index is only 4% above May’s 6-month lows, while Brent crude oil is around $72/bbl, printing lows since December 2021.
China’s May activity data will be closely watched after the weak April update. But there are many other minefields that could impact the Aussie’s chances of posting a third consecutive weekly gain.
The monthly US CPI release has been a frequent source of volatility over the past 12+ months, even before we see the Fed’s policy decision. A funds rate pause at 5.0-5.25% is widely expected but there will be a very close eye on the FOMC’s quarterly forecasts and Fed Chair Powell’s media conference.
It is a clean sweep of G3 central bank decisions this week, with potential volatility from both the ECB and BoJ. The ECB is widely expected to raise its deposit rate 25bp to 3.50%, with President Lagarde’s media conference likely to include some notable guidance for markets.
Bank of Japan Governor Ueda has indicated that it is too soon to move away from the zero rate policy, but he reserves the right to surprise markets if necessary.
Locally, after the RBA/GDP combination, Australia’s May labour force survey might not have too much impact. Westpac suspects that April’s weak -4k dip in jobs was related to the unusual timing of Easter so we look for a sharp 40k rebound, albeit keeping the unemployment rate at 3.7%.
Event risk
Aust Jun Westpac consumer sentiment, Aust May NAB business confidence, Germany Jun ZEW investor sentiment, UK Apr unemployment, US May CPI (Tue), NZ Q1 balance of payments, UK Apr GDP, US Federal Reserve (FOMC) policy decision (4am Thu Syd) (Wed), Aust May employment, NZ Q1 GDP, China May industrial production and retail sales, ECB policy decision, US May retail sales (Thu), Bank of Japan policy decision, Eurozone May CPI, US Jun consumer sentiment (Fri)
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