AUD/USD and NZD/USD Fundamental Weekly Forecast – Timing of RBA Rate Cut to be Determined by Wage, Employment Data

Last week, RBA Governor Philip Lowe made it clear a further improvement in the labor market was needed to get the economy rolling again toward its full potential. Conditions are expected to worsen by the June employment rate, due to be released in late July, making the first cut an obvious decision for the August meeting.”
James Hyerczyk
AUD/USD and NZD/USD

Last week, domestic central bank activity and U.S.-China trade relations controlled the price action of the Australian and New Zealand Dollars. This week, China will be in the news again with trade likely to be at the forefront again, followed closely by key economic reports.

Mid-week, labor market data will likely move the Australian Dollar. Last week, the Reserve Bank of Australia’s (RBA) monetary policy statement highlighted the importance of the unemployment rate in its next interest rate decision.

The Reserve Bank of New Zealand (RBNZ) cut its benchmark interest rate last week. Based on the price action, it looks as if this decision was telegraphed so the news had a muted effect on prices. Traders aren’t sure about the timing of the next rate cut with this week’s light economic reports offering little insight into that decision.

Australia Dollar

On May 7, the Reserve Bank of Australia left its official interest cash rate unchanged for the 33rd consecutive month, a little more than a week ahead of the Federal election. The rate is 1.5 percent, the same as August 2016.

In doing so, Reserve Bank Governor Philip Lowe said the decision to extend Australia’s longest-ever period of steady monetary policy followed below-target inflation, steady employment growth and a nationwide housing downturn.

“The Board judged that it was appropriate to hold the stance of policy unchanged at this meeting,” he said in a statement.

“In doing so, it recognized that there was still spare capacity in the economy and that a further improvement in the labor market was likely to be needed for inflation to be consistent with the target.”

“Given this assessment, the Board will be paying close attention to developments in the labor market at its upcoming meetings.”

New Zealand Dollar

On May 8, the Reserve Bank of New Zealand (RBNZ) cut its official cash rate by 25 basis points, bringing it down to the same level as Australia’s at 1.5 percent. The last cut was November 2016.

The RBNZ’s decision to cut rates appears to be based on a different approach to monetary policy, with the RBNZ looking to support growth ahead of a substantial rise in the jobless rate.

“Employment is near its maximum sustainable level. However, the outlook for employment growth is more subdued and capacity pressure is expected to ease slightly in 2019. Consequently, inflationary pressure is projected to rise only slowly,” the RBNZ said in its post-meeting statement.

“Given this employment and inflation outlook, a lower OCR [overnight cash rate] now is most consistent with achieving our objectives and provides a more balanced outlook for interest rates.”

Weekly Forecast

Last week, RBA Governor Philip Lowe made it clear a further improvement in the labor market was needed to get the economy rolling again toward its full potential.

According to ABC News, “No back-tracking on this one for the RBA. Lower unemployment and underemployment, where workers are searching for more hours to make ends meet, will soak up the spare capacity sloshing around the economy, inflation gets back to where the RBA wants it and GDP grows at its long-term trend, or better.”

The consensus view is Thursday’s labor force figures will show another solid increase in job creation in April, but the unemployment rate will hold at 5 percent.

Conditions are expected to worsen by the June employment rate, due to be released in late July, making the first cut an obvious decision for the August meeting.”

Additionally, Wednesday’s Wage price Index is expected to show hourly wages (excluding bonuses) rose by 0.6 percent, which would be enough to hold the annual growth at 2.3 percent. Anything better will help the RBA push back against rate cuts, anything worse will raise forecasts for a June cut.

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