Fx flash rate cuts in australia and new zealand underestimated 15 sept 2016

FX Flash

Group Economics Macro & Financial Markets Research

50 40 15 September 2016 30 20 10 0 -10 -20 -30  Jan-10 AUD declines after Jan-12 labour market softens in August Jan-11 Jan-13 Jan-14 Jan-15 Jan-16

Rate cuts in Australia and New Zealand underestimated

Roy Teo

 Financial markets pricing out rate cuts Australia Change in full time jobs '000in3mth avg (rhs)

Senior FX Strategist Tel: +65 6597 8616 roy.teo@sg.abnamro.com

 2016 year end AUD/USD forecast: Change in labor force 0.74 '000 3mth avg (lhs)  RBNZ likely to cut OCR by 25bp in November despite better than expected Q2 GDP  2016 year end NZD/USD forecast: 0.70

AUD declines after labour market softens in August The Australian dollar (AUD) fell by 20 pips to 0.7455 after data from the Australia Bureau of Statistics showed that the number of people employed declined by 3.9k in August 2016. This was weaker than market expectations of 15k increase. The unemployment rate declined from 5.7% to 5.6% as the labour force participation rate edged lower from 64.9% to 64.7%. Full time jobs increased by 11.5k while part time jobs fell by 15.4k. Overall our view that the labour market remains weak has not changed. In the first eight months of 2016, the total number of people employed has increased by 67.3k, a pale comparison to 172.8k in the same period last year. The picture on full time jobs is even more disturbing, declining by 50.9k compared to an increase of 93.1k from January to August 2015.

Labour market in 2016 has softened ‘000

Financial markets pricing out rate cuts in Australia RBA Official Cash Rate %

50 40 30 20 10 0 -10 -20 -30 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Change in full time jobs '000 3mth avg

1.50 1.40 1.30

1.20 1.10 1.00

Dec-16

Change in labor force '000 3mth avg

Source: ABS

Mar-17

Jun-17

15-Sep-16 Source: Bloomberg

Insights.abnamro.nl/en

Sep-17

01-Sep-16

Dec-17

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FX Flash - Rate cuts in Australia and New Zealand underestimated - 15 September 2016

Financial markets pricing out rate cuts in Australia Prior to this morning employment number release, financial markets have started to price out rate cuts in Australia as economic data in China (Australia’s main trading partner) stabilize and surprisingly optimistic comments from Reserve Bank of Australia assistant governor Kent. Earlier this week, RBA Kent said that there is good prospect that both wage growth and inflation will rise. Economic activity in the nonmining sector has also recovered better than expected. Finally he added that more than three quarters of the anticipated decline in mining investment has probably materialized.

RBA rate cut: not if but when; 2016 year end AUD/USD forecast: 0.74 Our view that further monetary stimulus in Australia is needed has not changed. This was communicated most recently on 6 September: FX Flash – RBA rate cut: not if but when. We see downside risk to our AUD/USD year end forecast of 0.74. This is based on our view that financial markets are underestimating the risk of a rate cut in Australia this year and that a 25bp rate hike in the US in December is not fully priced in. Hence we expect an unwinding of speculative long positions in the AUD to weigh on the AUD. RBNZ likely to cut OCR by 25bp in November despite better than expected Q2 GDP Earlier this morning, data from Statistics New Zealand showed that the New Zealand economy grew by 0.9% qoq in the second quarter, boosted by 5% growth in the construction sector. Economic growth in the first quarter was also revised higher from 0.7%qoq to 0.9%. Overall this is stronger than the Reserve Bank of New Zealand’s (RBNZ) forecast in the August monetary policy statement. We do not think that this is a game changer towards our call that the RBNZ is still likely to lower the Official Cash Rate (OCR) by 25bp to 1.75% later this year in November. A stronger than expected New Zealand dollar (NZD) is likely to complicate the inflation outlook going forward.

Since our last update FX Flash – NZD bull run nears intervention zone published on 9 September, the NZD has declined by almost 1% against the US dollar and against its trade weighted basket of currencies. However the NZD TWI is still more than 2% stronger than the RBNZ year end forecast. As our view that the RBNZ is likely to lower the OCR by 25bp to 1.75% in November is less than 60% priced in by financial markets, the NZD is expected to decline towards 0.70 against the USD later this year.

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FX Flash - Rate cuts in Australia and New Zealand underestimated - 15 September 2016

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FX Flash - Rate cuts in Australia and New Zealand underestimated - 15 September 2016