Inflation To Remain Lower For Longer
The release of the RBA’s quarterly Statement on Monetary Policy highlighted the dislocation between the expectations and efforts of the central bank and the movement of the currency.
Whilst there was very little to change to the economic outlook, the statement did contain updated quarterly inflation forecasts which struck a Dovish tone as, importantly, inflation is no longer forecast to return to the target range of 2% – 3% over the forecasting period. The forecasting period was extended to the end of 2018 from mid-2018 at the last update, and inflation is now set to run at sub 2% for much of the period, reaching 2% by end 2018.
Australia’s recent 2Q inflation reading showed inflation had weakened to just 1%, annualised, marking the slowest YoY rise in 17 years which saw the RBA cutting rates for the second time this year to now stand at historic lows of 1.5%. The recovery in Oil prices over the first half of the year, which drove much of the global uptick in CPI, looks now to be exhausted, placing further pressure on the Australian inflation outlook and increasing the likelihood of further RBA easing In the near term.
AUD At Odds With Fundamentals
However, markets are growing increasingly sceptical as to the effectiveness of these policy adjustments with the May rate cut producing only very temporary downside and the August cut seeing losses reversed the next day. Given the complicated way in which currencies have been responding to easing measures this year, it is difficult to explain the current rise in AUD, which stands contrary to fundamental factors, besides the still comparatively high Australian yield which continue to attract investors whilst global risk appetite remains buoyant. Indeed, looking at the CFTC positioning data shows a clear building bullish positioning over the last month.
Onwards & Upwards?
AUD strengthened in response to the release of the SoMP with bulls left un-phased amidst a lack of interest rate guidance from the bank, implying that the bank’s easing cycle is on hold. Referring to the currency however the RBA noted that it “remains a significant source of uncertainty for both inflation and growth forecasts” though stopped short of reiterating its risk to the economic outlook.
With US rate hike expectations scaled back in the wake of a dismal 2Q growth reading, and the RBA seemingly powerless for now, there seems to be scope for further appreciation in AUDUSD which now sits at an important technical juncture. The bullish channel which price has been moving in this year is close to its second challenge of a key bearish trend line which has provided resistance since November 2014.
US Employment reports released later today will provide the next catalyst for movement in the pair with the headline July Non-Farm Payrolls forecast to print 180k vs. last month’s bumper 287k print. Average hourly earnings over July are expected to have remained steady at 2.6% whilst the Unemployment rate is forecast to tick down to 4.8% from 4.9% previous. Readings in line with or above consensus should keep the current resistance intact, sparking an uptick in Fed rate hike expectations, whilst weak data could fuel the first daily close above the trend line in 2 years.
We also have the release of Canadian Unemployment data today which is expected to tick up to 6.9% from 6.8% in July with the Net Change in Employment expected to have increased by 10k. Though some analysts are noting an increase in employment from workers returning to Oil sands production after the Alberta wildfires disruption, services employment can be volatile in July based on volatility in the education sector.