AUD: RBA Likely to Ease? – Rabobank
Jane Foley, Research Analyst at Rabobank, suggests that the expectations
regarding the chances of another RBA rate hike spiked higher on the
back of the much softer than expected Q1 CPI report.
Key Quotes
“The
annual rate of inflation for the trimmed mean and weighted measures
eased to 1.7% y/y and 1.4% y/y respectively well below the RBA’s target
for a combined measure of these gauges which stands at 2% to 3%. While
this year’s recovery in oil prices will reduce the drag on the CPI
indices going forward, this base effect is unlikely to kick in until the
latter part of 2016 particularly if the AUD maintains the uptrend that
has been in place since the start of the year.
Despite strong gains in employment in Australia we see the low level of wage inflation as a constraint on domestic demand.
The
market is currently pricing in a 58% chance of a rate cut on May 3.
That said the Bloomberg survey suggest that the consensus of economists
is bias in favour of steady rates with just 10 of the 24 surveyed
expecting the central bank to cut rates on May 3. One potential
complicating factor for the RBA is the coincident timing of Australia’s
May 3 budget.
Earlier this month Moody’s warned the government
that the country’s AAA credit rating could be at risk unless that the
Treasurers exercised fiscal restraint. If Australian does lose its AAA
credit rating, this is likely to impact the ratings of commercial banks
and therefore is would likely increase the cost to them of wholesale
funding. This would likely lead to an increase in the cost of credit
which could be seen as a price to pay for not so prudent budget choices.
That said, one of the impacts of Basel 3 was to encourage banks to
diversify funding and thus to reduce reliance of wholesale funding. This
could mean that the additional cost to banks from one downgrade from a
ratings agency could be contained.
Irrespective of whether there
is a credit rating downgrade we would argue that the weak inflationary
backdrop suggests that the RBA already has ample reason to cut rates.
That said, the committee may favour waiting for the detail of the budget
in order to examine the likely overall impact on the economy. For this
reason we would see a steady policy announcement on May 3 as
exaggerating the chances of a rate cut by the summer months and we would
favour any rally in AUD/USD next week as a selling opportunity. We look
for a move towards AUD/USD0.73 on a 3 mth month view. This assumes a
June rate hike from the Fed.”
