The RBNZ joins the dovish stampede

Sean Callow

Westpac Bank

The US dollar was stronger against almost all major currencies this week. This was not so much due to positive news on the US economy but instead in response to negative developments elsewhere. The euro for instance tumbled on Germany’s very weak manufacturing survey for March.

The euro is also suffering from the lack of progress on Brexit. Early in the week, the British pound rallied on hopes that Prime Minister May’s Brexit plan might actually pass Parliament on its third attempt, which would shift the date of Brexit from 29 March to 22 May. The pound has since fallen about 1.5% as the Conservatives’ partner in minority government, the DUP, rejected Mrs May’s plan once again. A series of votes in Parliament on Brexit alternatives also failed.

So now Britain has until 12 April to agree to a new plan to present to the European Union in order to avoid a no-deal Brexit, which would cause significant financial turmoil and economic damage.

The US dollar is also sharply higher against the kiwi, after the RBNZ caught markets off-guard at this week’s meeting. In February, Governor Orr said the next move on its key interest rate could be up or down but after this week’s meeting, he said “the more likely direction of our next OCR move is down”. The RBNZ is concerned about slower growth in Australia, Europe and China.

Australia’s data calendar was very quiet this week but the RBNZ’s dovish turn sent both the Aussie dollar and Australian market interest rates lower. Markets are fully priced for the RBA to cut the cash rate by August, which remains Westpac’s call for the first of two cuts this year.

But pricing of a 1 in 3 chance of a rate cut by May is probably a little high, so long as domestic data remains mixed and fiscal policy is supportive of growth. Australia’s federal budget is typically delivered in May but with an election required no later than 18 May, the government has opted to announce the budget on Tuesday. Given that even a short election campaign would be around a month, parliament will be dissolved in April, allowing very little time for any legislation announced on Tuesday to become law.

But the RBA will be among those watching to see how much stimulus is announced by the government and also the response of the opposition Labor Party, which remains well ahead in opinion polls. The budget will probably draw more interest than the RBA decision a few hours earlier, with a steady hand at 1.5% very likely, along with limited change to the statement.

The week ahead includes plenty of Australian data, with February updates on retail sales, building approvals and the trade balance all due. Along with the federal budget, these will be important for the Aussie dollar’s ability to keep avoiding a break of 70 cents, as markets weigh up the case for RBA rate cuts. We will discuss these important releases when we speak to you next week.  

Sean Callow
Sean Callow
Senior Currency Strategist
Westpac Bank

Sean Callow is Westpac Bank's Senior Currency Strategist, based in Sydney. Sean focuses on the Australian dollar and other G10 and Asian currencies. He has worked in strategy and economics roles in New York, London, Singapore and Melbourne.

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