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.
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.”