The main focus tonight will be on Australia and the Reserve Bank’s monetary policy announcement. At their last meeting the RBA left rates unchanged and said, “Under present circumstances, an appreciating exchange rate could complicate the adjustment under way in the economy.” Investors interpreted these comments to mean discomfort with the current level of the currency and sent AUD tumbling lower as a result. There’s a small subset of investors looking for the RBA to ease this month because CPI declined in the first quarter and activity slowed according to the PMIs. However according to the following table, consumer spending rebounded, business confidence improved, the unemployment rate declined and market indicators ticked upwards. So like many of their peers, the RBA may opt to wait and see how the economy performs in the next month before taking additional action.
The Reserve Bank of Australia’s monetary policy announcement is in just a few hours! For the second month in a row, the RBA is expected to ease but economists are divided on a 25 vs. 50bp move. Here’s a table showing how Australian data fared since the last meeting. As you can see, weakness all around particularly in consumer spending, employment and activity – definitely not good news!
Here are the latest central bank rate cut/hike expectations. Nothing priced in for the Fed, BoE or ECB (though I expect the latter two to pull the trigger on more stimulus in the coming months).
RBA – Investors are pricing in 125bp of easing from the Reserve Bank of Australia by the end of the year! I have been bearish the AUD but 125bp is a FAR out of line. At most the RBA will lower rates by another 75bp and more likely only 50bp by Dec.
RBNZ – Investors are also looking for 50bp of easing from the Reserve Bank of New Zealand.
The Reserve Bank of Australia is gearing up to cut interest rates this evening. The market is currently pricing in 32bp of tightening which means that investors expect the central bank to reduce rates by a minimum of 25bp. 50bp is a possibility but given some signs of improvement in Australia’s economy (jobs and construction/services), I expect a more moderate move. Here’s a table comparing how economic data has fared since the last monetary policy meeting on April 3rd.