Aussie dropped after the weaker than expected inflation report, as traders took profit after the currency rallied to 2-year against USD and last week. Headline CPI moderated to +1.9% y/y in 2Q17 from +2.1% a quarter ago. The market had anticipated an increase to +2.2%. Key contributors to the weakness were lower automotive fuel prices as global oil prices plunged and the usual seasonal drop in domestic holiday, travel and accommodation prices. RBA's trimmed mean slipped 0.1 percentage point to +1.8%, in line with expectation, while the weighted median CPI climbed +0.1 percentage point to +1.8% in the second quarter. Consumer price levels are an important gauge of central banks' monetary outlook. The dilemma currently facing major central banks worldwide is the continuing economic growth and employment market improvement, alongside subdued inflation. At the July meeting minutes, RBA acknowledged that weak inflation is a global phenomenon with core inflation remaining low while headline inflation turning down..
As expected, the RBNZ left the OCR unchanged at 1.75%. Governor Wheeler reiterated that the monetary policy would remain accommodative for some time. The staff projection continued to forecast the first rate hike to come in 2H19. They also revised lower the short term inflation outlook and intensified the warning that a lower currency is needed for growth. NZDUSD jumped to a 3-day high of 0.7371 after the announcement, but gains were erased afterwards.
At the RBA minutes for the March meeting, policymakers raised concerns over the increasing levels of household debts which would be exacerbated by rising unemployment and falling consumption. The members also noted there had been a "buildup of risks associated with the housing market". While the central bank has been paying close attention to the housing market, including prices, supply, rents, debts and supervisory markets, the reference of "a buildup of risks" was non-existent in the March meeting statement and the February minutes.
The Fed increased the policy rate by +25 bps for the first time in a year. While this had been widely anticipated, the 'dot plot' indicated that the members expect three hikes in 2017, up from two previously. The accompanying statement was in a hawkish tone, upgrading the assessments to the economic outlook. The members reinforced that 'near-term risks to the economic outlook appear roughly balanced. Fed Chair Janet Yellen made no hint on how the new fiscal policy would affect the monetary stance. Yet, she stressed there is non-negligible uncertainty regarding the new policy.
The market was disappointed over the FOMC minutes for the May meeting. While the minutes should be considered as a confirmation of a rate hike in June, it raised the uncertainty over the future rate hike path. The members appeared divided over the inflation outlook. While one camp was concerned over the impact of falling unemployment on inflation, another camp remained focused on the downside risk to inflation. Meanwhile, it is getting more likely that the balance sheet reduction might begin 'this year'.
We expect BOE to leave the Bank rate unchanged at 0.25% and the asset purchase program at 435B pound at the upcoming meeting. The vote split might probably come in at 6-2 from 5-3 in June, as Silvana Tenreyro, successor of Kristin Forbes appears less hawkish and noted that the monetary policy decision would be data-dependent. Members favoring a rate hike were mainly hinged on the fact that inflation has been overshooting the central bank's target. However, there was a sign of slowdown on the consumer price level in June, offering room for policymakers to stand on the sideline amidst lackluster economic growth and wage, as well as uncertainty in Brexit negotiations.
The FOMC minutes for the June meeting unveiled that members were divided over the timing of balance sheet reduction while there was also discussion over the recent inflation weakness. At the meeting, the Fed raised its policy rate, by +25 bps, to a target range of 1-1.25%.Given the fact that the economic and medium-term inflation outlooks was largely unchanged since May, members generally judged that it was appropriate to adopt the continued removal of monetary policy accommodation. The rate hike decision was not unanimous.
As widely anticipated, the FOMC left the target range for the Fed funds rate unchanged at between 0.75- 1%. Although the accompanying statement was largely unchanged from the previous month, the implications were important in light of the slowdown in the first quarter. While acknowledging the recent weakness in growth and inflation, policymakers attributed it to 'transitory effects'. The downplaying of 1Q17's disappointments underpinned the Fed's determination to carry on its normalization plan. The FOMC maintained its economic outlook and the gradual rate-hike approach. We continue to expect two more rate hikes this year with one coming in June.
The FOMC minutes for the January meeting were a hawkish one. Many members expressed the view that it would be 'appropriate' to increase interest rate again 'fairly soon'. A few of them suggested removing policy accommodation in 'a timely manner'. However, there was no indication that it should arrive in as soon as March. Indeed, more clarity on the fiscal stimulus plan is needed before the members could decide on the timing of the rate hikes. While the general outlook to the economy remained upbeat (the description on the employment market was especially constructive),'a few' members were concerned about downside risks to the inflation outlook.
As widely anticipated, RBNZ left the OCR unchanged at 1.75% and maintained the neutral bias in the monetary policy stance. Domestic economic developments remained upbeat with rising inflation and positive growth outlook. Policymakers attributed weaker-than-expected 4Q17 GDP to temporary factors. The central bank acknowledged the recent depreciation in trade-weighted exchange rate. Yet, it reiterated that a weaker kiwi would be needed for more balanced growth. RBNZ warned that geopolitical uncertainty remained the biggest challenge in the global economic development. We expect RBNZ would stand on the sideline throughout the year.
The RBA minutes for the May meeting contained little news but reiterated policymakers' the importance of the property market and the labor market conditions in its policy decision. The stance to leave the monetary policy unchanged was obviously due to the perceived uncertain outlook in these two areas. As noted in the concluding statement in the minutes, 'the board continued to judge that developments in the labour and housing markets warranted careful monitoring'.
FOMC voted unanimously to leave its policy rate within a target range of 0.50-0.75%. The outcome had been widely anticipated as the Fed just adopted rate hike of +25 bps in December. Only minor changes were seen in the accompanying statement. In short, policymakers retained the stance that future interest rate change would be 'data dependent'. They also reiterated that economic conditions will evolve in a manner that will warrant only gradual increases in the federal fund rate'. The market has only priced in 2 rate hikes this year, although the December dot plot signaled there might be 3. CME’s 30-day Fed fund futures suggested a 17.7% chance of rate hike in March, down from 20.3% prior to FOMC meeting. Yet, they priced in a 38.8% chance in May, compared with 37.7% the day before the meeting.
RBA minutes for the February meeting contained little news. Indeed, it reinforced our view that the central bank would leave the monetary policy unchanged for the rest of the year. The market currently prices in further rate cut this year, followed by rate hike in 2018. The central bank acknowledged the -0.5% GDP contraction in 3Q16. While attributing most of the weakness to temporary factors including 'disruptions to coal supply and bad weather', policymakers also warned that 'slower growth in consumption had also been a factor'. However, they assured that such weakness should not have continued into 4Q16. On the growth outlook, the central bank suggested that 'GDP growth was expected to pick up to around +3% in year-ended terms later in 2017, and to remain above estimates of potential growth over the rest of the forecast period'
As expected, BOC left its overnight rate unchanged at 0.5% in January. Yet, it delivered a more dovish than expected message and sent CAD to a one-week low against USD. At the press conference, Governor Stephen Poloz revealed that 'Governing Council was particularly concerned about the ramifications of U.S. trade policy, because it is so fundamental to the Canadian economy'. He suggested that further rate cut cannot be ruled out of US' protectionist policy puts BOC's inflation target at risk.
Bank of Canada left the policy rate unchanged at 0.5% in May. Canadian dollar rallied to a 1-month higher against the US dollar after the announcement. Although the decision had been widely anticipated, traders were thrilled as policymakers acknowledged the strength in both global and domestic growth developments. The central bank also noted its expectations of 'very strong growth in the first quarter'. Yet, the abovementioned hawkishness was offset by concerns over subdued wage and price growth, leaving the overall statement neutral.
As widely anticipated, RBA left the cash rate unchanged at 1.5% in November. As we await Friday' Statement of Monetary Policy, policymakers revealed at today' statement that the macroeconomic guidance has stayed largely unchanged. In short, policymakers remained upbeat about the growth outlook, although they expressed concerns over household spending and soft inflation. Despite recent weakness in the Australian dollar, RBA reiterated the warning that higher exchange rate would lead to slower growth and inflation. Given the overall unchanged tone of the central bank, we retain the view that RBA would keep the policy rate unchanged at least until 1H18.
RBA minutes for the April meeting came in less upbeat than the March one, underpinning concerns over developments in Australia's labor and housing market. Policymakers concluded by noting that "developments in the labour and housing markets warranted careful monitoring over coming months". Note, however, that the meeting was held ahead of the release of the March employment report which showed that full-time payrolls rose the most in nearly 30 years. Aussie slumped after the minutes to a 3-day low 0.552.
As the market had widely anticipated, BOC has increased the overnight rate target, for the first time in 7 years, to 0.75%, from the historical low of 0.5%. The Bank Rate and the deposit rate rose to 1% and 0.5% respectively. Policymakers acknowledged the improvement in macroeconomic data, noting that the central bank's confidence in its outlook for above-potential growth and the absorption of excess capacity in the economy had been improved. Although inflation has remained soft, BOC judged that it is temporary and would reach the target by the middle of 2018.
EURCHF recovered after declining over the past three weeks. Political uncertainty and diminished expectations of ECB's QE tapering has pressured the single currency and raised demand for safe-haven assets. Despite the selloff to as low as 1.0629 in February, EURCHF had then rebounded to a 3-month high of 1.0825 in mid-March, before settling at 1.068 at end-1Q17. This came in line with over forecast of 1.07 for the first quarter. Movement of USDCHF was, however, more volatile than we had anticipated. The currency pair indeed broke below 1, plunging to a 4.5-month low of 0.9812 on March 27 before returning to parity on March 31. We attribute the sharper-than-expected weakness in US dollar over the past quarter to the inability of Trump's administration. Indeed, the market has turned less optimistic over the president's pro-growth policy, after the withdrawal of the healthcare bill. However, the price movements in the first quarter do not alter our view that SNB has turned more tolerable to franc's appreciation, although FX intervention would continue should euro's selloff accelerate.
As expected, RBNZ left the OCR unchanged at 1.75%, following three rate cuts in 2016. The policy statement has changed to a more neutral tone from an accommodative one previously. Yet, the central bank's rate hike forecasts stay at a slower pace than what the market has priced in. Policymakers acknowledged that economic growth has 'increased as expected and is steadily drawing on spare resources'. The outlook remain s positive. It also acknowledged the return of headline CPI to the target band, and judged it would gradually move to the midpoint of the band. We expect the OCR would stay unchanged for the rest of the year.