RBA backs away from reflation trend
As expected, the Reserve Bank of Australia kept its cash rate unchanged at 1.50%. Despite the widely-held view for no change, there was still a level of disappointment that the RBA refrained from discussing “normalisation” or offering a hawkish lean. We see this meeting as a warning to other central banks normalisation bull, such as those in CAD not to get too far ahead of economic data.
Governor Lowe acknowledged pick-up in external growth dynamics and improvement in domestic economy. The central bank removed the reference to GDP expanding slightly above 3% suggesting that growth forecast could be revised lower. The RBA noted that the inflation rate has fallen in response to weaker crude prices and stagnating wage growth. We see the RBA maintaining a neutral tone for the near-term as increasing household debt without catchup from wage growth could threaten financial stability should the RBA start tightening.
We remain bearish on AUD as believe the market is overpricing the central bank’s rush to reflation story and rising funding cost will remove the AUD shine.
Sweden’s bellwether of reflation story
Following the RBA failure to change bias, the Riksbanks monetary policy meeting will be closely watched for an expected shift in policy tone. We view this thinking because of recent ECB and BoE language rather than purely the result of improving economic data. While incoming data has been broadly positive, we doubt the time has come to revive the reflation story.
The Riksbanks will play a critical role in rejecting or confirming the monetary policy divergence theme. Recently, a Governing Council member stated that QE was less effective, increasing the likelihood that the central bank removes hints of additional QE measures. While this is a mildly hawkish adjustment, we doubt it will have severe consequences for SEK strength.
Switzerland retail sales declined less than expected
The Swiss franc is still trading below 1.10 against the single currency despite short-term bullish pressures on the pair. We believe that there is at the moment two major reasons that are pushing the euro against the Helvetic currency.
The French Presidential election and the start of the “Brexit” negotiations have removed – at least reducing the political and geopolitical uncertainties – so markets are clearly shifting towards risk-on and this is why we see the EURCHF pair moving up. In addition, Mario Draghi’s comments pushed the euro higher by stating the Eurozone recovery is progressing and the ECB monetary policy stance must accompany this recovery. Markets interpreted those declarations from the ECB as hawkish.
The Swiss fundamentals remain correct, even though inflation is clearly not picking up. We nonetheless remain concerned by the FX reserves which continue their massive increase. For the time being, the SNB holds tight to defend the Swiss franc. By the way, the Swiss central bank is now the world’s eighth most important investor with $80 billion dollars invested in the US market.
The CHF valuation does not depend on Swiss Economy data. Markets barely reacted on the release of retail sales growth which came in negative for the 2nd month in a row. Swiss political stability is still what attracts investors and we see the EURCHF pair showing a short-term continued bullish move towards 1.1000.
