• USD had a limited reaction to the U.S. April labour market report. While the U.S. unemployment rate fell to a 17 year low of 3.9%, average hourly earnings rose less than expected, which saw the annual rate of wage growth remain at 2.6% (YoY) after being downwardly revised the previous month. Incoming New York Fed President John Williams stated he was “perfectly comfortable with the fact that inflation may overshoot” the Fed’s 2.0% inflation goal. Williams repeated “I have said it many times, being a little above 2.0% after being below 2.0% for many, many years is not a problem”. Williams added that low neutral rates are with us “for the rest of our lives”. Williams also stated that the real neutral Fed funds rate (R*) “of between zero and 1.0% is likely going to be with us for a long time”. This is exactly in line with CBA’s view, and is a large reason why we have the nominal Fed funds rate peaking at 2.75%. Williams stated the Fed should consider reviewing its policy framework.
• In the U.S. economy later today, NAFTA trade agreements resume in Washington. Later this week, Fed Chair Jerome Powell will speak at a Swiss National Bank and IMF event in Zurich (Tuesday), and U.S. April inflation figures are due (Wednesday). Annual headline CPI inflation and core CPI inflation are both expected to lift to 2.5% and 2.2% respectively. We expect the USD to remain well‑supported this week, but William’s comments above introduce some two‑way risk into the USD this week, with a bias toward a softer USD.
• AUD/USD is likely to continue to consolidate this week, after doing so all of last week. We see modest upside risks in AUD after last week’s RBA quarterly Statement on Monetary Policy and upwardly revised Australian international trade surplus numbers. And if global equity markets can continue to recover, assisted by comments from incoming New York Fed President John Williams, that the Fed is comfortable with inflation lifting above 2.0% for a while. These comments are more likely to keep the USD on the back foot, helping to support AUD. We don’t see this week’s Australian Federal Budget impacting AUD. Most of the policy proposals have already been leaked.
• AUD/EUR lifted to a two‑week high on Friday as part of the consolidation process in AUD and EUR. We don’t expect a significant amount of AUD/EUR upside. The April composite PMI data have stabilised at levels which are consistent with robust Eurozone GDP growth. There was some regional variation in the data; German PMI data came in below expectations, while French PMI data printed in line with expectations. If the May Eurozone PMI data print at similar levels, it will confirm the Q1 slowdown was a soft patch. We get the revised estimate of Q1 Eurozone GDP growth next week. The European Central Bank (ECB) will feel more confident about the normalization of monetary policy in the knowledge the Eurozone economy remains firm.
• EUR/USD showed little reaction to comments by German Finance Minister Olaf Scholz, who spoke about the potential end of the Greek financial assistance program. Scholz said “it’s looking pretty good for us to end the program” of financial assistance to Greece. With Eurozone GDP growth travelling well (the recent softening accounted for), the likelihood of the Greek finances becoming problematic are smaller. However, if Greek issues do arise, this would generate a potential downside risk to EUR/USD. While Greek ten‑year bond yields have lifted in the last few trading sessions, they have remained on a downward trend since mid‑2015.
• GBP/USD is not likely to be affected by this week’s Bank of England meeting. We anticipate no change to interest rates. Attention will be on the BoE’s quarterly Inflation Report to gauge what the MPC think of the recent softening in U.K. inflation and GDP growth. We see some upside risks to AUD/GBP this week if the BoE appear patient, which is the most likely outcome.
• NZD/USD will this week be guided by the RBNZ’s policy meeting. It is the first OCR decision since the new RBNZ Governor, Adrian Orr commenced under the new Policy Targets Agreement that includes the employment objective. Given the strong New Zealand labour market, there is a risk of some upside surprises in the commentary despite persistent low inflation. A shift away from the current neutral policy stance would be a surprise. Nevertheless, we see some mild upside risks to NZD/USD after last week’s consolidation.
• USD/CNH is expected to stay range‑bound around 6.3500 on continued liquidity demand. This week’s external trade data from April will be also keenly watched after resuming the Chinese New Year hiccup, and after last week’s Sino‑US trade talk failed to produce tangible resolution. The U.S. demand of a reduction in its trade deficit with China by US$200 bn by 2020 drew heavy criticism. We expect trade tension headlines to drive CNH volatility this week.
• USD/HKD to continue to be supported around the top of the rigid trading band. However, large IPOs in coming weeks are expected to lock up significant HKD liquidity, which should lift interbank rates and put some downward pressure on the cross. We see no major threat to the USD/HKD band.
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