A less hawkish RBA?

AUD: a less hawkish RBA?

I have been following China's National People's Congress closely, and so far, it has been a bit of a letdown for the AUD. The government has announced a real GDP growth target of around 5.0% for 2023, which is slightly lower than what the market had expected, which was above 5.0%. However, I believe that 5% will be the lower bound for China's growth in 2023, and I still maintain my real GDP growth forecast of 5.2%, so I don't think this disappointment will have a significant impact on investors.

Additionally, my colleagues who specialize in China believe that the government will be focusing on the quality rather than quantity of growth, which means that they will be creating a more accommodative regulatory environment to boost private sector demand rather than relying on large policy stimulus efforts. This means that China's recovery won't provide the same boost to commodities demand that we've seen in the past. As a result, the AUD's attention will now shift to the RBA meeting outcome today (Tuesday 7th March), where I expect a 25bp rate hike to take the cash rate to 3.60%. However, the main driver of the AUD will be the RBA's rhetoric, rather than the rate hike itself.

Given the recent weak employment growth and modest acceleration in wages growth, along with decelerations in real GDP growth and inflation, the market has dropped its terminal cash rate forecast from a bit over 4.30% to a bit over 4.10%. Therefore, the market is already pricing in a less hawkish RBA, and the RBA will likely keep its forward guidance, which expects further interest rate increases will be necessary over the coming months. While this is in line with the market's pricing, I think the market may be overestimating the potential for a larger shift in the RBA's rhetoric.

Although the headline inflation has dipped from 8.1% YoY to 7.4% YoY in the monthly series, this is still well above the RBA's 2-3% target. Moreover, the slowing in real GDP growth was in line with the RBA's February forecast. Therefore, while the RBA's rhetoric may not be as hawkish as the market expects, I believe that they will still signal the need for further interest rate increases in the future.

CHF: steady as inflation goes

Last week's stalling in the interest rate rise provided some relief for the CHF. I'm keeping a close eye on today's release of the latest CPI data in Switzerland. Bloomberg's surveyed economists predict some pullback towards the 3% YoY handle, which is also the average forecast by the SNB for Q123. However, what's more interesting is whether Swiss core inflation will continue to push higher or not. If there are stronger pressures on that front, the SNB could keep extra rate hikes on the table after it meets this month. The SNB aims at inflation being between 0% and 2% for its price stability mandate, which leaves room for CHF rate markets to discount a higher terminal rate by the SNB. Even without that, the CHF is already appealing because of having the highest short real rates in G10 Europe. Additionally, relatively lower inflation compared to most other developed economies has spared the Swiss consumer, while superior fundamentals compared to its EU neighbours also support the CHF against the EUR.

USD: Powell, payrolls and (geo)politics

The 'USD-smile' has made a comeback in the global economy due to recent macroeconomic and geopolitical events. This is because of growing Fed rate hike expectations which have boosted King USD's rate advantage and its safe-haven appeal in the face of weaker market risk sentiment. This week, I will be closely watching the two-day testimony of Fed Chair Jerome Powell at the US congress on Tuesday and Wednesday, as well as the February Non-farm payrolls on Friday (preceded by ADP and JOLTS data on Wednesday). These events will have a significant impact on the market's view of the likelihood of more aggressive monetary tightening from here and more front-loaded rate hikes ahead of the 22 March Fed policy meeting. As a result, they could add to the currency's rate advantage and weigh on risk sentiment, which will boost the high-yielding, safe-haven USD. Although the US durable goods and factory orders data will be released, I doubt that they will have a sustained impact on the FX market. However, I think that some of the Fed-related positives are already reflected in the USD price, so I see further risk sentiment weakness as the key USD support at the start of the new week, particularly if there is a further tightening of the global financial conditions and/or renewed escalation of geopolitical risks.

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