AUD Buckles After Soft CPI
The Australian dollar suffered after Australia’s Q1 CPI inflation report came in much weaker than expected. Headline inflation fell sharply to +1.6% y/y (cons. 2.2%, prev. 3.1%). Market expectations had already been lowered by yesterday’s PPI report, but the scale of the miss was still surprising, and AUD promptly dropped 70 pips. The rates market had previously priced in a full 25 bp cut from the RBA on May 1, but is now looking for 32 bp of easing at the time of writing. Our Australia economists doubt it will come to that – instead they stick to their view that a full 50 bp of easing is indeed on the way, but will be spread evenly between the May and June RBA meetings. ECB policymakers continued to make their voices heard overnight with Governing Council member Nowotny sounding a little more dovish than usual, noting that an exit strategy is of no immediate concern, and that there is no point in lowering policy rates further “at least for the time being”. Growth remains a worry in the wake of disappointing flash PMIs across the Eurozone and we note that – as ECB officials have often stressed in the past – further cuts to the refi or deposit rates are not beyond the bounds of possibility. Bundesbank President Weidmann stuck to his hawkish instincts however and said monetary policy must do what is necessary when upside risks to Eurozone inflation increase. Today, Swiss trade data will provide the latest read on how CHF strength is affecting the domestic economy. Bank of Canada Governor Carney also appears before a parliamentary committee – monetary policy is the key topic for discussion and the governor is likely to sound as concerned as ever about household debt after the bank re-instated an explicit tightening bias at last week’s policy meeting.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank