AUD Jury is Out - Till Tuesday - Westpac
Sean Callow, Research Analyst at Westpac, suggests that AUD/USD’s path
to 0.80 we discussed last week has taken a huge hit from Australia’s
shockingly low Q1 CPI report.
“Whether 0.80 returns to the radar for May depends overwhelmingly on the RBA’s decision on Tuesday, with AUD risks ahead of the meeting tilted towards further decline.
In its Feb MPS, the RBA projected GDP to accelerate to 2.5-3.5% by end-2016, an upbeat view. Since the last meeting, we have seen the unemployment rate fall to 5.7%, a low since 2013 and business sentiment improve. China’s March IP and trade data also provided cause for optimism. This all argues for the RBA to remain warily upbeat on the growth outlook next week.
But the inflation reading was not just weaker than expected, but stunningly so. The media latched onto the -0.2% dip in the overall CPI but the market focus was on the meagre 0.2% q/q reading on core inflation. The 1.5% y/y print on this measure is the lowest since it began in the early 1980s and indeed probably indicates the weakest underlying inflation pressures since the early 1960s.
The RBA tolerates both undershooting and overshooting its 2-3% y/y target band but with our economists’ initial estimate for core inflation in Q2 holding at 1.5% y/y, the risks are that inflation will stay lower for longer, potentially weighing on public expectations and wage agreements. So while Westpac is sticking to its call for no change in the cash rate on Tue, we can appreciate why the market scrambled to price in a 60% chance of a rate cut, from just 10-15% pre-CPI.”