Market Briefing: RBA holds the line
Consolidation. US equities tread water, while long end bond yields slipped back & the USD ticked a bit higher in quiet trade.
RBA holds. No change in rates or guidance by the RBA. This exerted some pressure on the AUD. But we think this may be a short-sighted market move.
Riskbank cut? A rate cut by the Riskbank later today could reinforce thinking the ECB & BoE may soon follow. This might weigh on EUR & GBP.
With limited news flow it was another quiet night on markets. In contrast to the ~1.2% rally in the major European stock markets, the US S&P500 lost momentum (+0.1%). Though this has come after three straight solid gains which totaled more than 3%. US bond yields extended their post US Fed decline with the benchmark 10yr rate down another ~3bps. At 4.46% the US 10yr rate is near a 1-month low and ~28bps below its April highs. The markets assumptions regarding the US Fed easing cycle are little changed with the first full rate cut factored in by November. Traders brushed off comments from Minneapolis Fed President Kashkari, who is normally hawkish and a non-voting member in 2024. According to Kashkari, in his view the most plausible scenario is that rates stay where they are “for an extended period of time”, and while the hurdle for another hike is high, he wouldn’t rule it out completely as there are questions about how ‘restrictive’ policy is given elevated inflation.
In FX, the USD index ticked up slightly. Ahead of tomorrow nights Bank of England meeting, where a ‘dovish’ message suggesting an easing cycle is coming into view is looked for, GBP slipped back (now ~$1.2510). EUR drifted a little lower (now $1.0755), while USD/JPY edged higher (now ~154.65). That said, USD/JPY remains ~3.5% below last week’s multi-decade peak. USD/SGD nudged up (now ~1.3545), and the AUD lost some ground after the RBA failed to exceed the markets ‘hawkish’ expectations at yesterday’s meeting (now ~$0.6597).
The economic calendar is light again today. In the US, a few Fed members speak (Jefferson (1:30am AEST), Collins (1:45am AEST), and Cook (3:30am AEST)), but non look to be chatting about monetary policy. In Europe, Sweden’s central bank (the Riksbank) holds its meeting (5:30pm AEST). It isn’t something we would normally touch on, but it is anticipated the Riksbank will cut rates for the first time this cycle. Sweden is a small open economy so it is often impacted by global/regional trends quickly. A move by the Riksbank, which would follow the cut by the Swiss National Bank in March, could reinforce thoughts that other major central banks, particularly the ECB and BoE, might follow. This may exert downward pressure on European currencies like the EUR and GBP, which in turn generates some support for the USD.
Global event radar: BoE Meeting (Thurs), US CPI & Retail Sales (15th May), Fed Chair Powell Speaks (15th May), China Data Batch (17th May), Eurozone PMIs (23rd May)
AUD corner
The AUD (now ~$0.6595) has given back some of its recent gains over the past 24hrs, with the AUD also a bit weaker against the EUR (-0.3% to ~0.6134), NZD (-0.3% to ~1.0990), and CNH (-0.2% to ~4.77). The catalyst was the drop in Australian bond yields (the 3yr rate shed ~10bps) after the RBA kept rates on hold at 4.35% and repeated its mantra that when it comes to the future policy path it is “not ruling anything in or out”. As outlined in our Market Briefings over recent days and our weekly Currency Chat Podcast, this is the outcome and market reaction we were looking for, as we thought participants were too eager to assume the RBA could revert to its prior explicit rhetoric that “a further increase in interest rates cannot be ruled out”.
That said, we think this is a bit of word play and a short-sighted move in markets and the AUD. From our perspective the underlying tone of the RBA’s broader comments and new forecasts suggest the risk of another hike is non-negligible and/or that relatively high interest rates are set to be in place for some time. Indeed, when asked RBA Governor Bullock stated the Board discussed the option of raising rates yesterday, and that the recent flow of data means policymakers need to stay ‘alert’ and ‘vigilant’. Moreover, the RBA’s updated projections saw near-term inflation revised higher, and while a gradual decline back to the middle of the target band by mid-2026 is still projected this was conditioned on a ‘technical assumption’ (derived from market pricing) that has fewer rate cuts over the horizon compared to the last Statement on Monetary Policy put out in February (see chart below). For more see Market Wire: RBA: Vigilant to the risks.
Despite its modest post-RBA setback, we continue to hold a positive medium-term bias on the AUD. In addition to a looked-for revival in China’s economy as policy stimulus measures gain traction, and outlook for a softer USD as US growth slows and the US Fed’s easing cycle nears, we have also long thought that the RBA would diverge from its offshore counterparts. This appears more apparent from the RBA’s latest outlook. We continue to believe that the stickiness in domestic inflation, a resilient labour market, incoming stage 3 tax cuts, and prospect of more cost-of-living relief at the May Federal Budget point to the RBA lagging its peers in terms of when it starts and how far it goes in the next global easing cycle. Longer-term, this should see yield differentials shift more in favour of a stronger AUD, in our opinion.
AUD event radar: BoE Meeting (Thurs), AU Wages (15th May), US CPI & Retail Sales (15th May), AU Jobs (16th May), China Data Batch (17th May), RBNZ Meeting (22nd May), Eurozone PMIs (23rd May)
AUD levels to watch (support / resistance): 0.6530, 0.6580 / 0.6640, 0.6700
Market Moves
Peter Dragicevich
Currency Strategist - APAC
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