Did the RBA Get it Wrong?

The RBA downgraded its growth and inflation forecasts released with its quarterly SOMP report early Friday, subtly hinting at further easing. Governor Stevens sees average growth of +3% in 2012, down from its February estimate of +3.5%, and expects CPI to rise +2.5% in the year to December, from a previous prediction of +3%. The copy does not suggest that down-under policy makers will be embarking on an aggressive easing cycle, but hints at further easing in its monetary policy stance by saying that it will adjust the cash rate “as necessary based on information on economic and financial conditions.” Currently the market is trying to price in another -50bp of easing in Q3, especially given the overall dovish tone of the statement. The prospect of weaker rates support will continue to undermine AUD performance going forward very much leaves parity outright a short term target.

Below are some other highlights of the week:

Asia

• NZD: Down under, the Kiwi business confidence index rose again last month, up +2p to 35.8, however, noticeably the activity outlook edged down to 36.1 from 38.8 in March. Digging deeper, both investment and profit expectations continued to rise, while the employment intentions slipped during the period. Analysts note that while the activity outlook is still at levels “consistent with a pick-up in growth momentum, markets and the RBNZ are likely to be more concerned about the less optimistic outlook of the agriculture industry.”
• NZD: Kiwi trade surplus was smaller than expected in March due to weaker exports and stronger imports. Exports have fallen for the fourth consecutive month, down-6% from the peak six-months ago and led by their favorite industry, dairy products.
• AUD: An inflation indicator slowed to +0.3%, m/m in April from +0.5% in March. It’s worth noting that new home sales also fell in March by +9.4%.
• SGD: Singapore employment rose +27k in Q1, down from a +37k rise in Q4 as services employment slowed. The unemployment rate has edged a tad higher to +2.1%, up from +2% in Q4.
• KRW: Korean, IP surprised weak, falling -3.1%, m/m in March, leaving the y/y growth rate flat at +0.3%, well below the +2.2% consensus forecast.
• AUD: The RBA and Chinese PMI this week has ended up being a double whammy for Aussie. The RBA cuts rates by more than expected (-50bp). The OIS market was pricing about-33bps of easing for the meeting and rallied after the decision to price another three cuts for the year ahead. The risk of further cuts has the currency on the back foot, with some analysts focusing on parity yet again.
• CNY: Chinese Manufacturing PMI rose to 53.3 in April from 53.1 in March, a tad below consensus, but in line with the modest improvement in last week’s HSBC Flash PMI. Overall, the release should help to “ease concerns about a hard landing but falls short of providing much evidence of a pickup in Chinese activity which would have been necessary to materially boost risk appetite and offset the RBA effects on the AUD.”
• Asia: The PMI round up for the region saw China’s HSBC PMI revised slightly higher to 49.3 in April from a 49.1 flash. Digging deeper, new orders rose to 49.7 from 47.4 in March.
  Elsewhere, PMIs for April were stable in KRW at 51.9, but sharply lower in TWD, fell to 51.2 from 54, m/m.
• CNY: China’s non-manufacturing PMI fell to 56.1 in April from 58 the previous month.
• NZD: Kiwi unemployment rose to +6.7% in Q1 from +6.4% in Q4. Analysts note that the sharp positive move is a reflection on the increase in the “participation rate,” now at +68.8% from +68.2%, rather than deterioration in labor market conditions.
• AUD: Aussie Performance of Services Index slumped -7.4 points in April to 39.6.
• KRW: South Korea’s foreign-exchange reserves climbed +\$890m to a record +\$316.84b in April.

AMERICAS Week in FX

Europe Week in FX