Central Bank Rate Decisions the Focus of the Week
AUD
The Aussie dollar opens slightly down against majors this morning, despite a lack of economic data within the Asia-Pacific region over recent days. Asian equities were higher on the close with the Hang Seng leading the way, up +0.5%, while the ASX closed Friday’s session up +0.3%, buoyed by IT & real estate stocks. No Aussie or Chinese data expected today, while tomorrow brings domestic monthly Retail Sales. With the figure expected to fall -0.2%, no doubt the RBA will be pairing reduced consumer spending with recent falls in consumer process when considering the size & relevancy of a potential interest rate hike one week from tomorrow. Markets are still pricing in another two 25bp hikes. We also expect Chinese PMIs tomorrow, with both the Manufacturing & Non-Manufacturing figures expected to increase drastically to 50.2 & 52.0 respectively. There’ll be an increased focus on the data amid lingering questions on how much of an impact China’s reopening will have on the global economy, particularly in the case of commodity currencies (AUD, NZD, CAD) given widespread anticipation for when Chinese firms will ramp up buying of materials to meet demand.
USD
AUDUSD opens slightly down at 0.7105 off the back of Saturday’s positive US data, while a strong finish to the week for US equities saw the NASDAQ closing up +0.9%, the S&P 500 +0.2% and the Dow Jones up +0.1%. Notably, the Federal Reserve’s preferred measure of US inflation (Core PCE Price Index m/m) slowed again in December, although the changes were largely muted and suggest price pressures could be slow to abate heading into the start of the year. The figure rose 4.4% from a year ago, the smallest annual increase since October, while Consumer Spending dropped 0.2% pointing to an economy that was grinding to a halt as 2022 closed. While the strength from the core services (+0.4% m/m) was partially offset by relief from core goods, breadth measures show a clear decelerating trend, i.e. inflation persisting but at a much slower pace. Economists are currently predicting one more 25bp hike this Thursday morning, bringing the rate to 4.75%, while maintaining the terminal rate before potentially easing off in September.
EUR
AUDEUR opens slightly down at 0.6540 while European equities were relatively flat on the close, with the DAX up +0.1% & the CAC flat. This evening we see Spanish Flash CPI y/y expected at +4.9%, down from last month’s +5.7%, while German Preliminary GDP q/q is expected flat given recent price pressures & an overall decline in economic activity. There’s a whole assortment of low-tier data from the Eurozone this week, although the main point of focus will be Friday’s ECB main refinancing rate. While the ECB rarely pre-commits to a policy move, last month President Lagarde gave guidance of a 50bp hike at the upcoming meeting (which would take the rate to 3.00%). Apparently, as part of the compromise with members who at first advocated another 75bp hike in December; an agreement to raise rates by 50bp was accompanied by an agreement to hike by another 50bp on February 2 & explicitly not rule out another half-point move in March. Notably, there’s been a significant shift in sentiment in the Eurozone. The initially-dominant downside risks have largely reduced given the milder-than-expected winter & drop in natural gas prices. Some economists are even suggesting the widely-accepted impending recession may now be avoided, although views are subject to change depending on incoming data.
GBP
AUDGBP opens down at 0.5730 while the FTSE closed up +0.1%, having joined relatively flat global equity sessions. No data expected today while focus remains on Thursday evening’s Bank of England interest rate decision & Official Monetary Policy Report. The BOE was among the first of the G10 countries to commence the interest rate normalization process, yet markets are still anticipating another 50bp hike with would bring the rate to 4.00%. High inflation readings and strong wage growth appear to outweigh the UK’s economic slump, while the BOE’s forecasts see the economy contracting 1.5% y/y & output falling another 1% in 2024. The market is not as pessimistic.
NZD
AUDNZD opens down at 1.0943 as this morning’s Trade Balance report arrived well-above expectations. The balance of trade remained negative at -475 million, although largely exceeded expectations of -1.9 billion & reflects the strongest figure in over 6 months. Additionally, NZ unemployment is expected to fall back to record lows of 3.2% given Wednesday’s labour data. With a smaller pool of talent from which Kiwi firms can recruit, the Reserve Bank is expected to be watching more closely for evidence of high pay rises that could compromise its current fight against inflation.