FX comment – AUD under pressure ahead of RBA monetary policy decision

by: Roy Teo

 

Weak economic data and commodity prices weigh on AUD

Positive momentum in the Australian dollar (AUD) has reversed yesterday after economic data came in weaker than expected. Inflation expectations in March declined for the second consecutive month to 1.7%, the lowest reading since August 2015. This is in line with our view that inflation in the first quarter is likely to remain subdued. In addition, retail sales in February came in weaker than expected, a reflection of weak consumer confidence. The service sector contracted in March, the 5th month of contraction in the last 6 months. The service PMI employment sub index also remained below 50. This implies that job growth is likely to remain subdued in Australia. Finally weakness in commodity prices (7% slide in CRB index since 17 March) is starting to put some pressure on the AUD.

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RBA expected to keep OCR unchanged today; markets are underestimating the risk of easing in May

The Reserve Bank of Australia (RBA) is widely expected to keep the Official Cash Rate (OCR) unchanged later today. In our view, financial markets are underestimating the risk of a 25bp rate cut in May given weakness in the Australian economy. Some commentators have highlighted that it is unlikely that the RBA will lower monetary policy next month as the central bank awaits details from the government’s Budget on 3 May. However we disagree. In 2013 and 2015, the RBA had cut the OCR on the same month before the Budget details were announced. In short, while it is premature to state that a top in the AUD has been formed around 0.77, headwinds to further gains in the AUD have increased given overcrowded speculative long futures positions in the AUD. A close below 0.74 in the coming weeks will reignite bearish momentum in the AUD.

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