Aussie off highs on growth forecast cuts

Reference to two rate cuts

In its quarterly Statement on Monetary policy, the Reserve Bank of Australia trimmed its near-term growth forecasts and scaled back its CPI forecasts. The Australian economy is expected to expand 1.75% in the 12 months through to June, down from 2.5% from three months ago, but growth for the full year 2019 was expected to pick up to 2.75%. That’s still down from 3% at the last forecast though that pace of growth was maintained through to 2021. It’s interesting to note that the latest forecasts are based on the assumption that official rates follow current market pricing, which implies two cuts of 25 bps to 1.0%.

The main culprit for the downward revision was household spending, which accounts for 60% of GDP, as “subdued growth in household income and the adjustment in the housing market affect consumer spending and residential construction”.

On the inflation front, a weak rentals market is helping to keep headline CPI under pressure, and the Bank cuts its 2019 underlying inflation forecast to 1.7% from 2.0% previously.

The Aussie dollar responded positively to the statement, despite the implications of two rate cuts in the forecasts, rising as much as 0.45 versus the US dollar and 0.69% versus the Japanese yen. AUD/USD traded above the 200-day moving average for a third time in four days but has yet to register a close above it in this cycle. The average is now at 0.7006 and the last close above it was on April 17.

The gains proved to be fleeting following US newswire reports that proposed tariff increases on $200 billion of Chinese goods will go ahead at midnight tonight. AUD/USD is now just below the 0.70 handle at 0.6993.

AUD/USD Daily Chart

Source: OANDA fxTrade

All quiet on the tariff front

The first day of the latest round of US-China trade negotiations came and went without much fanfare, and it was confirmed that they would continue today in Washington. A slight positive was drawn from comments by US President Trump that he had received a “beautiful letter” from China’s Xi Jinping and remained positive that a deal is still possible. The news caused US indices to rally but it was short-lived after the US press reports on tariff implementation at midnight tonight. US indices are now down about 0.1%. China shares rose 2.77%, recouping more than yesterday’s losses.

China A50 Daily Chart

Source: OANDA fxTrade

UK growth at 1-1/2 year high?

Before we get to the tariff deadline, we have a slew of UK data released. The UK economy is seen growing 1.8% in the first quarter, an acceleration from the 1.4% pace seen in Q4 and potentially the fastest growth rate since Q3 2017. At the same time we see industrial production data for March, which is expected to rise 0.5% m/m.

The US session sees US CPI numbers for April, which are seen increasing at a slightly faster rate of 2.1% y/y from 1.9% in March. Speeches from Fed’s Brainard and Bostic and ECB’s COEURE complete the package.

The full MarketPulse data calendar can be viewed at https://www.marketpulse.com/economic-events/

Though no doubt all eyes will be in the trade talks and the midnight deadline for tariffs and we will likely be picking up the pieces (or not) on Monday morning.

Have a great weekend.

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