ACY: Is The RBA Behind The Curve?
The last time the Reserve Bank of Australia (RBA) adjusted their Overnight Cash Rate, it was a 25 basis point (bp) cut on August 3rd, 2016.
This 25 bp cut to the benchmark rate to 1.50% was the last of a total of 300 bp of rate cuts dating back to November of 2011 and included 50 bp of easing on May 2nd 2012.
In the minutes of the March 4th meeting, the RBA focused on improvements in the domestic employment market as a key anchor to the overall economic stability, even though wage growth has been acutely stagnant.
This lack of wage growth didn't dissuade the RBA members from judging that further declines in the unemployment rate would lift the pace of wage growth, increase the levels of household consumption and allow the central bank to hold the cash rates unchanged as GDP growth eventually muddled higher.
Investors in the Australian bond markets clearly do not agree with the RBA's upbeat assessment. Last week both the local 5-yr and 10-yr bond yields reached an all-time low of 1.41% and 1.72%, respectfully.
Perhaps the RBA didn't read the IMF's Q4 assessment of the Aussie economy which showed that the domestic household debt-to-GDP ratio is now at an unsustainable 120% and that over 60% of the country's household wealth is invested in a softening real estate market; both of which will cap consumer spending over the medium-term.
With the 1-yr to 5-yr segment of the local bond market all yielding less than 1.5%, the math suggests that the RBA is behind the curve and that they should cut rates to 1.25% at Tuesday's meeting.
However, with a Federal election expected to be held sometime over the next 5 to 6 weeks, we believe the odds of the RBA lowering rates this week to be in the 20% to 30% range. That doesn't mean that the central bank won't downgrade their assessment of the economy or increase their dovish bias.
As such, we expect the nuances of the RBA's statement to have an asymmetrical impact on the AUD/USD with the risk to the downside. In other words, a more hawkish hold could see the pair trade back to .7150, while a more dovish bias could see the Aussie trade back below .7000.
With no first-tier data scheduled in the Eurozone until later in the week, we could see relative modest trade in the EUR/USD. The risk is that either US Retail Sales or Durable Goods orders print higher on Monday and Tuesday, which could push the pair back below 1.1200.
The USD/JPY finished last week in the upper end of the weekly range but still appears to have a downward technical bias. On the daily charts, we see a band of price resistance which covers the 111.25 to 111.40 range.
The third rejection of the UK Withdraw Bill pressured the GBP/USD lower into the weekend as the pair lost over 1.5% for the week. The technical momentum indicators are looking very soft and a break of the 1.2940 level would likely open up the pair for downside extension into the 1.2800 handle.