RBA cut its forecast for inflation

May 6, 2016

FX News Today

RBA cut its forecast for inflation: The RBA has cut its forecast for underlying inflation in 2016 to 1-2% from 2-3% in the Statement on Monetary Policy. The Bank’s forecasts for growth and the labour market were little changed from the February Statement on Monetary Policy. Further rate cuts look likely this year amid increased risk that inflation expectations remain persistently lower for longer than the Bank currently expects. The 3-year yield fell to a record low 1.567% after the Statement. AUD-USD fell 0.8% to 0.7400 from 0.7460 as the Australian dollar lost value against the U.S. dollar following the release of the Statement. The 0.7450 level had been a strong support area during March and April.

EMU: What Investment Weakness? Eurozone Q1 GDP numbers may have surprised on the upside, but growth projections continue to be revised down. Global risk factors aside, weakness in core countries and the apparent lack of investment have been largely blamed for the modest growth performance as well as the ECB’s latest round of easing measures. But while Draghi’s policy of easy money has managed to give equipment investment a strong boost, governments are still not delivering on either structural reforms or budget consolidation and their over-reliance on the central bank’s cheap funds will come back to haunt the Eurozone

Lots of Fedspeak: Fed’s Lockhart said he’s on the fence currently regarding a June rate hike, in a CNBC interview. And he said the Fed should keep the rate hike option open. It’s too early to tell much about Q2 GDP. He does believe the Brexit vote could be a consideration for policymakers. Fed governor Kaplan also concurred with the latter sentiment, in comments on Bloomberg Radio. He added he’d like to see more job market improvement, along with evidence of firming inflation. SF Fed’s Williams on CNBC said he’s optimistic on growth and believes that “residual seasonality” in Q1 GDP understates the health of the economy and views the jobs mandate as largely met, while inflation is rebounding. Finally, StL Fed’s Bullard reiterated June is a live meeting and added that options are open. The open question is whether the data will justify a hike.

Japan PM Abe is continuing his tour of Europe: Urging cooperation against undesirable volatile FX moves, where “appropriate action” will be taken as needed given the impact on Japan’s trade-reliant firms. He argues for coordination on the global economy, along with flexible fiscal policy and avoiding over reliance on monetary tools. Ahead of the G7 meetings he says that there is agreement with leaders of UK, France and Germany that FX stability and not rapid FX moves are desirable after recent rapid and speculative trade, though Japan isn’t attempting to influence FX moves on a permanent basis. Clearly Japan is feeling the pinch of the strong yen and it is undermining their reflation goals. USDJPY remains over 107 and is currently trading at 107.20.

Main Macro Events Today

US Employment (NFP): US Employment for April is out later and should reveal a 210k (median 208k) headline for the month following larger increases of 215k in March and 245k in February. Initial claims improved dramatically during April which could help lift the headline but consumer confidence measures and ADP were subdued.

Canada Employment: We expect a 10.0k rise in April employment, due Friday, after the 40.6k surge in March. The risk is the downside for April, as goods sector jobs could remain soft while the service sector could see a more modest gain (or pull-back.) The unemployment rate fell to 7.1% in March after moving to 7.3% in February. We expect the rate to nudge to 7.2% in April. Hours worked are seen rising 0.2% m/m in April after the flat reading in March.

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