In this briefing:
- RBA and RBNZ in the Hot Seat, Trump’s Tirade Threatens Global Risk Appetite
- Low Inflation May Force the RBA’s Hand in May
- Dollar Tests Highs as Global Risk Aversion Remains Elevated
US and global asset markets appear to have built in a completed US-China trade deal relatively soon. Equities have rebounded this year, despite sluggish global trade and industrial activity since last year. If a trade deal proves elusive, or indeed if the US raises tariffs, it can significantly undermine global asset markets.
Trump’s tweets may be tactical, but his administration has demonstrated a willingness to use tariffs to reset trade relations and for broader domestic and geopolitical objectives. Unless there is a clear backlash on the US economy and US equities, we should expect the Trump administration to keep pushing the envelope on trade relations.
The market is leaning slightly against an RBA hike later today. We think the RBA should cut to send a clear message that its inflation target still matters and to address a sharp fall in inflation expectations in the last six month. As such we do expect them to cut. In any case, they will probably express an easing bias. We don’t see as much urgency for the RBNZ to cut on Wednesday, but if the RBA go, the RBNZ is likely to follow. Either way, the pressure for lower rates, the relative strength of the US economy, and weaker global growth trends suggests downside pressure remains on both AUD and NZD.
The downside miss on inflation in Australia probably forces the RBA’s hand to cut rates. The RBA generally doesn’t fuss too much with appearances once it changes its mind, so a cut at its next policy meeting as soon as 7 May is likely, even though it would come only weeks before the Federal election on 18 May.
One cut is unlikely to be viewed as significant enough to make a material difference on the inflation outlook, so a second cut is likely before the dust has had time to settle on the first, so within the next Month (4 June) or two (2 July).
The risk is high that a rate cut watch in Australia dominates near term AUD price action and triggers a further significant fall in the currency.
The USD is testing the top of its range for over a year against the DXY major currency index, and its highs for the year-to-date against the broader Bloomberg dollar index against ten leading currencies. The rebound in the USD is surprising in light of the stronger than expected Chinese economic data. However, other economic reports suggest that global manufacturing and export growth remains weak; including flash April PMIs and export data in Korea and Singapore. Strength in the dollar reflects some risk aversion related to higher oil prices on USA’s Iran policy, Brexit risks, Italian government risks, and USA trade policy risks. US bond yields stalled, consistent with some risk aversion. However, US equities powered to new closing highs.