- The FOMC minutes for their May 1-2 meeting showed there was widespread agreement that the recent dip in PCE inflation was likely “transitory”, and the commitment to a patient approach remains strong, with that stance likely to be appropriate “for some time” even if global conditions continued to improve.
- Fed speakers generally espoused a patient and balanced stance, NY Fed President Williams noted that he doesn’t see any strong arguments to move interest rates, “one way or the other,” Boston Fed President Rosengren said he sees, “no clarion call,” to raise interest rates any time soon. St Louis Fed President Bullard didn’t rule out a cut later this year if inflation continued to disappoint.
- UK inflation data for April proved to be mixed around market expectations. Although RPI rose to 3.0%y/y (vs est. 2.8%y/y), the rise was due to fuel and holiday prices. Core CPI at 1.8%y/y and headline CPI at 2.1%y/y both undershot.
- UK markets continued to focus on the potential of an imminent forced or cajoled resignation of PM May given the increased lack of support for her latest version of the Withdrawal Agreement Bill (WAB).
- The end of May before the end of May? The political temperature in Downing Street increased dramatically this week. PM May succumbed to pressure earlier this month and stated that she would leave office once her Brexit plan (Withdrawal Agreement Bill, or WAB) was either passed or rejected. In a last ditch attempt to garner cross party support, May hoped to present the latest version of the WAB to Parliament for a fourth time the Whitsun recess (23rd May – 4th June). Accompanying the WAB are 10 points, designed to foster cross party support, covering issues from how to accommodate the Irish Backstop, potential of a temporary customs union and a potential vote on whether to hold a second Brexit referendum. This plan backfired with apparently fatal consequences for her leadership. Rather than finding a plan that has pleased all factions, the plan infuriated and inflamed nearly all of these factions before the Bill is published on Thursday.
AUD huddled near five-month lows - pinned into recent trading ranges 0.6870 / 0.6900 and just a whisker above its recent rough of 0.6865 and well off the 0.6934 top briefly reached at the start of the week.
Adding to the case for stimulus was data showing construction work done fell a real 1.9% in the March quarter, led by home building and engineering. The disappointing figures reinforced expectations of another poor reading for GDP following surprising weakness in the previous six months. That sombre outlook overshadowed otherwise bullish news on commodity prices as iron ore topped $100 a tonne thanks to tight supplies and Chinese demand.
Against all odds, AUD is holding up well in the face of a host of bearish risks as positioning, technicals and lingering trade optimism limit the downside. Weak emerging market currencies are bearish risks for AUD as well. USD/CNH has been ranging in the 6.9200-6.9400 zone but other Asian currencies are still weak (USD/IDR, USD/HKD and USD/SGD trade at or near highs).
While China's yuan is stable for now, other Asia currencies could be signalling that long AUD might be the wrong view. Still, AUD bears cannot make progress. Lingering hopes of a U.S.-Sino trade deal, elevated net-short AUD positions, new highs for iron-ore and a likely limited impact to expected RBA rate cuts could be giving AUD reason to pause. Near oversold momentum studies, which suggest the bear trend could be losing steam, likely hinder bearish progress as well.
For now AUD seems destined to consolidate in the 0.6850-0.7075 range.
Markets are almost certain the Reserve Bank of Australia (RBA) will cut its 1.5% cash rate by a quarter point when its policy board meets on June 4, the first easing since mid-2016. The governor has indicated in about the clearest possible language that a rate cut is likely imminent
The latest lows near 0.6860 act as immediate support for the pair, a break of which highlights January 2016 low surrounding 0.6830, followed by 0.6800 round-figure during further south-run. Alternatively, a descending trend-line since April 18 at 0.6930 may limit the pair’s immediate upside ahead of fuelling it to 0.7000 resistance level.
Event Risk Data Today
- No Australian Economic data today.
- NZ: Finance Minister Robertson gives the pre-Budget speech today, with potential for signals about the 30 May Budget.
- Germany: May IFO business survey is released.
- Euro Area: ECB President Draghi participates at the G30 meeting in Spain.
- US: Apr new home sales are expected to fall back 2.5% after a 4.5% gain in Mar. Fedspeak involves Kaplan, Daly, Bostic and Barkin on a panel.