RBA likely to shift to slightly more hawkish in July following the solid Australian jobs report
AUD: RBA may no longer roll-forward purchases to Nov-24 bond after the strong May jobs report - the Australian May labor force smashes all expectations with employment rising +115.2k (Citi; 39.1k, Consensus; 35k), and the unemployment rate falling from 5.5% to 5.1% (Citi and Consensus; 5.5%) even as the participation rate rises from 66% to 66.2% (Citi and Consensus; 66.1%). Even more impressive is the gain in full-time employment by +97.5k, with part-time up +17.7k. The number of unemployed also falls to 701k, while the underutilization rate declines to 12.5% and the number of hours worked increases by 1.4%.
- AUD: The stellar May Labor Force Survey implies that the RBA will likely feel more confident hitting its 2%-3% inflation target by early 2024 as the Australian labor market is far healthier than even the most recent forecast from the RBA. The labor market has easily brushed-off the end of JobKeeper and the unemployment rate is now where it was forecast to be at the end of 2021, reducing the distance to NAIRU (natural rate of unemployment) from around 1.5pp to 1.0pp. The incredible recovery in the labor market now means that the unemployment rate is back to pre-covid levels from February 2020. There are also fewer unemployed people in the economy, despite greater labor force participation compared to pre-covid levels in February 2020. The number of hours worked is also 2.9% above pre-covid levels, and this is evidenced by a further reduction in the underutilization rate which is now at its lowest level since Feb-2013.
- AUD: Consequently, Citi analysts now believe that the RBA no longer needs to roll-forward its purchases from the April-24 bond to Nov-24 bond at its July meeting (marking a shift to a slightly more hawkish stance). Effective forward guidance, via yield curve control (YCC), no longer needs to commit to the cash rate remaining unchanged over a rolling 3-year window. This means that the RBA can keep the YCC target being the April 2024 bond, i.e., rolling-down forward guidance to less than 3-years. However, there still remains a considerable gap between recovery and lifting inflation sustainably to within the 2% to 3% target. So the RBA’s bond purchases (LSAP) is likely to be extended from September but evolving to an upper-limit rather than a set target. This would give RBA the flexibility to slow its asset purchases if the economy continues to outperform, without having the adverse signaling impact of a hard taper announcement. It’s also consistent with the Bank’s recent view that the absolute size of the balance sheet, rather than pace of increase, is more important.
RBNZ to hike by late 2022 following stronger than expected NZ GDP
- NZD: NZ GDP rises 1.6% in Q1, following the 1% decline in Q4 - real GDP at 2.4% is now above the pre-covid level with the result well above both consensus (+0.5%) and Citi (+0.7%) expectations. Following the stronger than expected Q1 GDP, Citi analysts lift their NZ GDP forecast for 2021 and 2022. Domestic demand continues to lead the charge with higher costs likely to be passed onto consumers. Therefore, the team also lift their 2021 CPI forecast to 2.4%. This implies that the RBNZ will begin hiking the OCR in Q3 2022, with the OCR expected to be 1.5% by the end of 2023, and a terminal rate of 2.5% by Q4 2024.
- NZD: Demand growth appears to be running ‘white-hot’ as all major domestic sectors expand. It’s worth noting that even in Q4, when NZ GDP fell, domestic final demand was positive but was overwhelmed from the large drag from net exports. In Q1, net exports have been an even bigger drag (-4.0ppts off GDP), but is more than offset by stronger domestic demand (+5.2ppts to GDP). Moreover, consumption continues to rebound on the back of ongoing reopening of the economy, with a rotation towards services spending expected to persist in 2021.
- NZD: GDP growth is 2021 is likely to be stronger… the far stronger than expected momentum and breadth of domestic expansion requires a significant upward revision in the outlook. Citi analysts boost their 2021 NZ GDP forecast to 5.3% (+1.3pp) and for 2022 to 2.9% (+0.8pp). The RBNZ will also need to make substantial upgrades to economic activity after forecasting a decline in Q1 GDP of -0.6%. Citi analysts also make upward revisions to their NZ inflation outlook by upgrading the 2021 CPI forecast to 2.4% (+0.2pp) and 2022 CPI forecast to 2.0% (+0.2pp). Citi analysts now look for the RBNZ to begin rate (OCR) hikes in Q3’22. This change of view from the team’s long held Q2’23 starting date means they now have the OCR at 1.50% by the end of 2023 and a terminal rate of 2.50% by Q4 2024.
SNB meeting - steady, only slight twists
- CHF: SNB leaves policy settings unchanged overnight as it continues to forecast moderate inflation in the medium-term and sees spare capacity for some time despite surprising but slight upward revisions to its forecasts. With progress on controlling the pandemic and inflation in the “price stability zone“, there are some ever-so-slightly hawkish twists - SNB drops reference to generous liquidity provision for banks and speaks less about the euro depreciation. Citi analysts expect SNB to defend the Franc at 1.10 to EUR for now. The team do not expect a rate hike until 2025 and not before the ECB. That being said, SNB may reduce its balance sheet before rate lift-off, if CHF depreciation allows it.
Data due tonight
- GBP: UK Retail Sales, May Forecast: 1.3% MM 28.5% YY Prior: 9.2% MM, 42.4% YY; Ex Auto Fuels, May Forecast: 0.9% MM, 25.9% YY Prior: 9.0% MM, 37.7% YY – Citi analysts expect retail sales growth to slow sharply in May as the surge in durable and semi-durable spending in April has likely eased in the weeks since – weighing on overall growth. Citi analysts expect these data to moderate over the coming months as the rotation towards consumer goods evident during the pandemic begins to unwind somewhat. However, the overall level is likely to remain relatively resilient.
This is an extract from the Daily Currency Update, dated June 18, 2021. Please approach a Citigold Relationship Manager if you would like more information. For the latest updated CitiFX house views and strategy (updated every Monday) please click here -