Once more, the high of the US equity market on Wednesday coincided almost exactly (in fact within 10 minutes) of the high of the AUD/USD exchange rate. The Aussie Dollar rose steadily through the European morning to reach a best level of 0.7910; the first time it had been back on a 79 cents ‘big figure’ since February 20th. From its level at that moment of 25,110, the Dow Jones Industrial Average then fell almost 430 points over the next 4 hours, dragging AUD/USD down to a low of 0.7870. Overall, however, the Aussie has been pretty resilient. The US stock market is this morning almost exactly where it was immediately prior to Friday’s US labour market numbers (DJIA at 24,800) but AUD/USD is still more than half a cent higher.
We mentioned last week that NAB scrapped one of the two RBA rate hikes in its forecast profile for 2018. Macquarie Bank is the latest local name to push back its forecast for the RBA’s first rate increase since late 2010, now seeing this in early 2019 rather than its previous forecast for August of this year. “The primary reason for pushing back our RBA call is that the Bank can err on the side of growing the economy faster for longer to erode spare capacity and have confidence that inflation is firmly moving back into the 2-3% target… After two years of below-target inflation, and at least another one to come, there seems little danger of generating a meaningful pick-up in inflation expectations from keeping interest rates low for longer.” Looking at short-term market interest rates, the implied probability that the RBA will deliver a 25 basis point rate increase by the end of this year is roughly 45%, a view that Macquarie describes as “about right.”
In the only incoming economic data today, expected inflation rate as represented by the Melbourne Institute Survey of Consumer Inflationary Expectations, increased by 0.1 percentage points in March to 3.7% from 3.6% in February. Total pay growth over the 12 months to March 2018 increased to 2.0% from the December quarter reading of 1.5% although respondents appear cautious about future wage growth; expectations for pay growth in the next 12 months fell to 1.8% from 2.4% in the previous quarter. The Australian Dollar opens in North America this morning at USD0.7855, with AUD/NZD at 1.0745 and AUD/CAD1.0180.