The Aussie and the Kiwi were sent in opposite directions following the release of Australian CPI data and the RBNZ’s interest rate decision, respectively. After the events of today, pricing in the interbank market suggests interest rates in Australia may match those in NZ as early as October. In other words, the market is looking for another 50 bps of cuts from the RBA, while the RBNZ holds its cash rate steady at 2.5%. While we are only looking for one cut of 25 bps this year by the RBA, the possibility of a more dovish RBA and more neutral RBNZ may weigh on AUDNZD later this year.
The RBNZ to remain on hold this year
At a monetary policy meeting this morning, the Reserve Bank of New Zealand elected to leave the official cash rate at 2.5%, as expected, while indicating that rates will remain on hold throughout 2013. The RBNZ noted that the kiwi is hurting certain areas of the economy and is overvalued, and rising housing prices are a concern. All of that was expected. However, the bank didn’t hint at the possibility of influencing the exchange rate, either through interest rates or by intervening in the FX market. This was somewhat of a disappointment for investors that were looking for the bank to be more vocal about the idea of pushing the NZ dollar back towards its fair value, at least according to the RBNZ.
Looking ahead, we see the kiwi as a continual hindrance to key parts of the economy. But the threat of rising inflation later this year may prevent the bank from cutting the official cash rate to offset the impact, given the statement by the bank today. There is still an outside chance the bank will intervene in the FX market to devalue the kiwi, but we don’t think this is likely given it would be an uphill battle for the bank to keep the kiwi materially depreciated for a significant period of time.
Australia’s CPI misses estimates
In Australia, CPI for Q1 missed market expectations, sending the Aussie lower. Headline CPI rose 0.4% q/q and 2.5% y/y, much less than the 0.7%q/q and 2.8% y/y estimated. Trimmed mean and weighted medium CPI increased 2.2% y/y and 2.6% y/y respectively, well within the RBA’s 2-3% target. Overall, the inflation data should see the RBA retain its easing bias at its May meeting. Although, we think the chance of a rate cut is unlikely as this stage, as we need to see weakness in other economic data.
Recent figures show that consumer confidence has rebounded and there as signs of a broader pick-up in growth in non-mining parts of the economy, which may keep the RBA on hold next month. However, when mining investment peaks later this year, there is the possibility that non-mining parts of the economy will not be able to fill the gap.
JPY eyes the BoJ
USDJPY was fairly jumpy today in the lead up to a policy meeting at the BoJ which begins tomorrow. Not much is expected from the BoJ this time around. As the bank implements policy easing it announced earlier in the month and assesses its impact on inflation and growth.
Ones to watch