RBA taking it easy

May 17, 2016

No major central bank decisions this week, but plenty of indications of their thinking with minutes from the FOMC, ECB and the RBA overnight from Australia. The rate cut earlier this month was not fully expected by the market, so it should not be a surprise that the minutes were suggesting that the RBA is taking a cautious approach to the outlook. Perhaps it is not surprising was that it was the “broad based softness in prices and costs” was the main factor behind the decision to cut rates to 1.75%. They also noted the impact of “supervisory measures” on the housing market, which had tightening lending standards and taken some of the heat from the housing market, reducing the risks of lowering rates. The Aussie jumped around 1% on the back of the release, brining it above the 2.5 month lows recorded yesterday on AUDUSD at 0.7237. The focus remains with New Zealand and Canada, the other commodity bloc currencies, as the next major central banks to cut rates, with New Zealand likely to cut rates early June. AUDNZD was also marking 2.5 month lows yesterday, but the policy backdrop does argue for a more sustained correction into June.

Sterling has been on a firmer footing for the past couple of sessions, something which could be challenged by today’s inflation data. The headline rate is seen steady at 0.5%, with core prices falling from 1.5% to 1.4%. PPI data is also seen at the same time, so volatility risks are increased. Sterling has 5 weeks to go to the ‘Brexit’ referendum in June, which still has the potential to weakness the currency should the polls continue to show only a slight margin for the ‘remain’ camp. US CPI data is also seen this afternoon. The dollar has settled into a range (dollar index) after the recent recovery from the early May lows. Meanwhile, ahead of the G7 meeting at the end of the week, the pressure is reduced on the Bank of Japan in terms of the strength of the yen vs. the USD, the yen 2.6% weaker vs. the dollar from the USDJPY lows.

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