AUD/USD kept to tight ranges last week even as market pricing for another RBA hike increased. In the week ahead, US debt negotiations will be watched each day, while on crosses, AUD/NZD is under pressure ahead of the RBNZ decision on Wednesday.
AUD/USD traded a tight 0.6605 to 0.6710 range last week, another week of daily closes with either a 0.66 or 0.67 handle, which has prevailed since early March. One-month realised daily volatility is down to around 9%, lows since April 2022 and compared to highs above 20% in November 2022.
While these ranges are very familiar, economic data flow over the week ensured that the Aussie traded mostly at the lower end of ranges. On Tuesday, China’s April activity data fell well short of expectations. Given that activity in April 2022 in China was depressed by Covid lockdowns, the annual changes showed sizeable growth, 5.6%yr for industrial production, 18.4%yr for retail sales. But the monthly changes were weak: 0.5% for retail sales and a -0.5% contraction in industrial production.
This sluggish start to Q2 in China prompted some forecasters to revise down their 2023 GDP growth forecasts. The median forecast on Bloomberg is 5.7%yr, after just 3.0% in 2022. Westpac looks for 6.2% growth this year.
Australia’s key data also didn’t help the currency’s cause, though the overall view remains that the labour market is resilient. The Q1 wage price index rose 0.8%qtr, 3.7%yr. The 0.8% quarterly rise matched Q4, both printing below consensus. But the 3.7% annual wages growth was a high since 2012 and leaves the series on track for Westpac’s forecast of a cycle peak at 4.0%yr in Q4 2023.
Australian consumers reacted to the RBA’s surprise May rate hike with a near-8% monthly fall in confidence in the Westpac survey. More surprising was the April labour force survey, which showed a -4k dip in employment (after a revised 61k jump in March) and a rise in the unemployment rate to 3.7% from 3.5%. However, the details offer hope that seasonality (the timing of Easter) explains some of the weakness.
Despite the mostly soft local data, markets are taking seriously the RBA’s hawkish turn in May, pricing around a two-thirds chance of another 25 basis point rate rise by the 1 August meeting. This increased yield support has helped the AU-US 2-year bond spread consolidate around a -75bp discount, still a substantial weight on the A$ by historical standards, but it has narrowed from around -115bp mid-April.
Australia’s calendar is nearly empty until April retail sales on Friday. US data is worth noting as always, along with the FOMC minutes, but Fed Chair Powell has probably set the tone for the FOMC for now, making clear to a conference on Friday that he judges a pause in June as prudent. Westpac believe the funds rate has peaked at 5.00-5.25%.
On A$ crosses, AUD/GBP will be sensitive to UK April CPI, where base effects are expected to help inflation finally roll over from above 10% to nearer 8%yr. But AUD/NZD surely has the most at stake as the RBNZ delivers its policy decision on Wednesday. Most economists expect a 25bp hike to 5.50%, a handful look for +50bp to 5.75% and market pricing is also somewhat split, at 5.58% to start the week.
Westpac expects 25bp this week and a cash rate peak of 6%. Such an outlook is increasingly evident in AUD/NZD, which has slipped below 1.0600 to levels last seen in December 2022.
Event risk
US debt ceiling negotiations continue (no fixed date), S&P Global flash May manufacturing and services PMIs including Australia, Japan, Eurozone, UK, US (Tue), RBNZ policy decision, NZ Q1 real retail sales, Germany May IFO business survey, UK Apr CPI, FOMC May meeting minutes (Wed), Aust Apr retail sales, UK Apr retail sales, US Apr personal income and spending, US final May U Michigan consumer sentiment (Fri)
