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FX Daily: Fed in blackout period, RBA today, BOC tomorrow
RBA could surprise with a hike today, and the BOC tomorrow too
Group Research - Econs, Philip Wee6 Jun 2023
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    DXY settled at 104 after failing to extend Friday’s appreciation above last Thursday’s 104.5 high. Investors took profit after the US government averted a potential debt default. US President Joe Biden signed the Fiscal Reform Act that suspended the federal debt ceiling until January 2025. ISM Services PMI disappointed with a fall to 50.3 in May; consensus had expected an increase to 52.4 from 51.9 in April. The Dow, S&P 500, and Nasdaq Composite indices fell by 0.6%, 0.2%, and 0.1%, respectively. In turn, the US Treasury 2Y yield eased 3.1 bps to 4.466%, and the 10Y fell 7.6 bps to 3.683%. 

    The Fed is in a blackout period ahead of the FOMC meeting on 14 June. Interest rate futures see a lower 27% chance (vs. 69% high on 26 May) of a hike on 14 June and a 50% probability for a summer hike in July. Consensus expects US CPI data, which comes a day before the FOMC, to slow to 0.2% MoM in May from 0.4% in April after the ISM Services PMI prices paid sub-index fell to 56.2 from 59.6. Overall, markets expect the Fed to pause in June and lift the Fed Funds Rate forecast for 2023 in the dot plot. However, US Treasury Secretary Larry Summers said the Fed should contemplate a bigger 50 bps hike in July if it paused this month.

    AUD/USD fluctuated in last Friday’s 0.6580-0.6440 range. Today, we cannot rule out the data-dependent Reserve Bank of Australia delivering a back-to-back 25 bps hike to 4.10%. Australia’s CPI inflation was surprisingly strong at 6.8% YoY in April from higher housing costs (+8.9%), more expensive food and non-alcoholic beverages (+7.9%), and loftier transport costs (+7.1%). Consensus had expected a slower climb in headline inflation to 6.4% from 6.3% in March. Although the labour force shed 4300 jobs in April, it added 61K and 52K in March and February. April’s 3.7% unemployment rate was slightly higher than the near 50-year low of 3.5%. Last Friday, the Fair Works Commission granted the country’s highest wage increases since 1990. From 1 July, almost 2.75 million workers (labour force was 14.4 million in April) will receive a 5.75% lift in the minimum wage. Overall, the labour market did not cool enough to ensure that inflation returns towards the 1-3% target anytime soon.

    USD/CAD failed to break above last Friday’s 1.3410-1.3450 range. Tomorrow, the Bank of Canada could surprise with a 25 bps hike to 4.75% after keeping rates unchanged in March and April. On 4 May, BOC Governor Tiff Macklem gave a speech to the Toronto Region Board of Trade, warning that getting inflation from 3% back to the 2% target would be more difficult. However, April’s data showed inflation struggling to drop below 4% to 3%. CPI inflation rose to 4.4% YoY in April, contrary to the consensus for a drop to 4.1% from 4.3% in March. More importantly, headline inflation picked up to 0.7% MoM in April, its highest since October, after three months of 0.4-0.5% readings. It did not help that real GDP growth rebounded by an annualized 3.1% QoQ sa in 1Q23 after a mild 0.1% contraction in 4Q22, led by a 5.7% boost to household consumption from 1.1%.


    Quote of the day
    “We’re in a very much data dependent mode. We’re not going to declare victory until victory’s achieved.”
         RBA Governor Philip Lowe on 31 May.

    6 June in history
    The US Securities and Exchange Commission was established in 1934.

     
     

    Philip Wee

    Senior FX Strategist - G3 & Asia
    [email protected]

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