On Friday, the market was prepared for a quiet day ahead of the US non-farm payrolls report, but the release of the RBA’s Statement on Monetary Policy came as a shock, driving the AUD lower.
The RBA sharply downgraded its inflation outlook, with the significant “miss” for Q1 CPI no doubt having a strong influence. With the mid-point of the projected inflation range (1.5%-2.5%) for 2017 and June 2018 right at the bottom of the 2-3% target band, the market concluded that more easing was likely.
The AUD fell sharply on the announcement and further losses ensued, with the currency ending the week at 0.7366, a loss of 1.3% for the day.
The NZD fell in sympathy, with investors concluding that with the same forces affecting NZ, further RBNZ easing was also more likely.
The NZD fell by 0.8%, ending the week at 0.6831. With the NZD now more than 2 cents off its recent high of 0.7054, the currency sits near the bottom end of the upward channel that has been in place since February.
On technicals, a break through 0.6790 would see the NZD through the bottom of the channel, raising questions about whether the upward trend was still in place. As the AUD was under pressure, NZD/AUD reached as high as 0.9312, but closed the week at 0.9239.
By comparison the US non-farm payrolls release was fairly uneventful. Employment was soft, increasing by only 160k, the slowest pace since September, and the unemployment rate was steady at 5.0% (4.9% expected). However, with upward revisions to prior months, annual wage inflation was slightly higher than expected at 2.5% y/y ensuring that the USD held its ground, following some volatility as the market digested the result. EUR/USD and USD/JPY closed the day little changed.
GBP found renewed selling pressure as nerves remain high ahead of the 23 June referendum on UK membership of the EU. GBP/USD closed down 0.4% at 1.4427.
Over the weekend China released data showing its foreign reserves rose by USD7.1 bn in April. The stronger EUR and JPY for the month resulted in a positive valuation effect when measured in USD. One estimate we saw suggested a net $14bn capital outflow for the month, well down on the $100-150bn run rate seen late last year and early this year.
Reduced capital outflows have helped ease the downward pressure on the Yuan, with less need for the PBoC to rundown reserves to maintain its policy of “currency stability”.
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