RBA Preview: Not So Rosy - ING
Research Team at ING, suggests that the dismal 1Q16 CPI data is a game-changer for AUD as we near the RBA rate decision.
Key Quotes
The
Australian economy looks in decent shape right now. While we think
there may be some downside risks to 2016 GDP growth (ING: 2.4%;
consensus: 2.6%), we look for activity to materially rebound in 2017 and
estimate growth of around 3.2%.
Yet, there is little inflation
in the system and last week’s dismal 1Q CPI print has fuelled RBA easing
expectations. The negative surprise to 1Q16 CPI (actual 1.3% YoY vs
1.7% cons) has fuelled market expectations for an RBA rate cut, with
talk of a move as early as next week’s meeting (3 May). A survey by
Bloomberg shows 15 analysts are looking for the cash rate to be left at
2%, while 12 expect a 25bp cut.
Will the RBA pull the rate cut
trigger this week? We think not, but certainly look out for a dovish
shift in policy bias. While the prior statement stated that “continued
low inflation would provide scope for easier policy”, we suspect that
next week might be too soon for a material RBA rate cut. Indeed, it
would be a complete U-turn on what has been some progressive steps
towards a more neutral stance. Moreover, on the inflation front, one
saving grace might be the fact that survey-based inflation expectations
have remained resilient in recent months (around the 3.5% mark). While
it is likely to be a close call, we favour a “no change” outcome given
the improving growth backdrop, more stable global environment and
ongoing concerns over a buoyant property market.
Iron ore
dynamics point to seasonal AUD uplift, fade this effect. Our house view
is that iron ore prices will fall back to US$50/tonne in 2Q16 as
seasonal effects fade.
Dovish RBA policy shift will still be
enough to weigh on AUD. The trade-weighted AUD has rallied by more than
6% since late Jan. We suspect that the RBA may cite stronger concerns
over broad-based currency strength at the forthcoming meeting given that
is starting to negatively feed through to the real economy (via lower
tradable prices).
The RBA opening the door to future rate cuts
is a game-changer for the AUD outlook; part of the recent rally had been
founded upon rate differentials moving in favour of the AUD. Markets
are pricing in a strong chance of a cut this week (circa 60%
probability) and therefore should the RBA remain on hold for now (our
base case), we may see an initial relief rally in the AUD.
Yet,
expect any upside to be shortlived; we continue to think that the
bearish fundamental backdrop and waning seasonal effects will see AUD
trade lower in the coming months. Look for AUD/USD to fall back to 0.72
by 2Q16, while we also like to tactically sell AUD against JPY &
NZD.”
