FX Weekly

Sean Callow


The yes or no from the RBA on a 1.75% cash rate should determine AUD/USD’s path over the next week and beyond, overshadowing the budget and even US non-farm payrolls. If the RBA holds steady as we expect, the Aussie should recapture 0.77, though the impact of the CPI shock will linger.

11:42AM, 02 May 2016

AUD/USD all about the RBA

Australia’s Q1 CPI data was not supposed to be especially relevant for the RBA outlook and thus for AUD. The RBA has for months said that inflation is low enough to allow for another rate cut, should Australia’s growth prospects warrant it. Falling unemployment and above-average business confidence argue for the RBA to maintain its existing cautious optimism over the economy in 2016/17. However, inflation was not just weaker than expected, but stunningly so. The media latched onto the -0.2% dip in the overall CPI but the market focus was on the meagre 0.2% q/q reading on core inflation (excluding volatile items). The 1.5% y/y print on this measure is the lowest since it began in the early 1980s and indeed probably indicates the weakest underlying inflation pressures since the early 1960s.

The RBA tolerates both undershooting and overshooting its 2-3% y/y target band but with our economists’ initial estimate for core inflation in Q2 holding at 1.5% y/y, the risks are that inflation will stay lower for longer, potentially weighing on public expectations and wage agreements. So while Westpac is sticking to its call for no change in the cash rate on Tue, we can appreciate why the market scrambled to price in a 55% chance of a rate cut, from just 10-15% pre-CPI.

The yes or no from the RBA on a 1.75% cash rate should determine AUD/USD’s path over the next week and probably for some time beyond. The steady hand we expect should see AUD/USD bounce to above 0.77, though probably not as far as the 0.7760 pre-CPI level, given that the door would still be wide open for a rate cut later in the year. Should the RBA cut the cash rate, then we would see interest rate markets move to price in a 1.5% cash rate (currently just above 1.60%). This could knock AUD/USD below 0.75.

However, downside on the Aussie should be limited by resilient iron ore prices and a soft US dollar in the wake of the weak US Q1 GDP data and Federal Reserve meeting. Markets do not fully price another Fed rate rise until May 2017. The RBA meeting overshadows other notable events and data this week, including the Australian federal budget, retail sales and export data and the US April employment report.

Sean Callow, Sydney

KEY EVENTS AND DATA: Aust NAB Apr business survey, US Apr ISM manufacturing, China, Singapore, UK holiday (Mon), Japan holiday (Tue-Thu), Aust Mar building approvals, RBA policy meeting, 2016/17 federal budget, China Apr Caixin/Markit manufacturing PMI, NZ dairy auction (Tue), NZ Q1 unemployment, US ADP private payrolls, Apr ISM non-manufacturing (Wed), Aust Mar retail sales, Mar trade balance (Thu), RBA Statement on Monetary Policy, US Apr nonfarm payrolls, Canada Apr employment report (Fri)





Weekly Bias

1m outlook

3m range


0.76 0.74/0.78

0.69 0.62/0.74

1.10 1.08/1.13

 0.66 0.64/0.69

 82 79/87

 0.5350 0.50/0.54

1.02 1.00/1.05

 5.00 4.75/5.10
EUR/USD    1.15 1.08/1.16

108 103/115