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.
Key Quotes
“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.”
