Australian Dollar Hit by Wage Data, Rally Inspired by RBA Minutes Dies a Quick Death

The Australian dollar is softer following the release of latest wage price data that confirms the RBA's concerns about the outlook for Australian inflation are well founded.

• Wages rose just 0.4% q/q and 2.1% y/y – on both measures growth is the slowest on record
• RBA minutes released on Tuesday saw AUD rise, but we warned gains would be fleeting
• GBP to AUD at 1.9840, AUD to USD at 0.7275

Growth in the wage price index (WPI) slowed further in Q1, rising just 0.4% q/q and 2.1% y/y – on both measures growth is the slowest on record.

The weakness likely reflects both domestic and global factors.

"Unemployment remains elevated in Australia, but even in those economies at, or close to, full employment wage growth has remained low. We expect wages growth to remain soft over the next year or so, which will keep inflation low, while also remaining as a headwind to household spending," say ANZ Research in reaction to the data.

The data saw the Australian dollar exchange rate complex give up its recovery and the Australian to US dollar exchange rate is now 0.75% down on the previous day's close at 0.7269.

The pound to Australian dollar has risen by 0.5% to 1.9847.

In its recent inflation forecast downgrade, the Reserve Bank of Australia (RBA) clearly reassessed its view on the wages outlook.

Minutes released on the 17th noted that “the forecasts embodied the expectation that growth in the wage price index would stabilise around current quarterly growth rates before gradually picking up later in the forecast period”.

On that front, these numbers look to be marginally weaker than the Bank’s expectations.

"Weak wage growth will keep inflation low. Today’s numbers suggest that growth is yet to stabilise on this measure. This suggests that the risks to the inflation outlook remain tilted to the downside, and household income growth will continue to be a constraint on consumer spending," say ANZ.

The Australian dollar rose in relief a mere 24 hours earlier; while many analysts warn the RBA is likely to deliver another AUD-negative interest rate cut again it was this lack of explicit guidance within the minutes that saw the Australian dollar rise as markets believe another rate cut at the Bank is not as assured as they had assumed.

Latest Pound / Australian Dollar Exchange Rates

	Live: 2.0101▼ -0.3% 12 Month Best: 2.1645
*Your Bank's Retail Rate	1.9418 - 1.9498
**Independent Specialist	1.982 - 1.99 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Post-Minutes Strength was Temporary, as Warned

The RBA minutes highlight the potential for the weakness in inflation to become entrenched, noting that “if inflation was to be persistently lower than previously forecast, it was possible that, in time, this could be reflected in lower wage growth”.

The minutes also expressed a concern that there is a possibility that labour costs could pick up sooner than expected, while heightened job insecurity is likely to be a factor in the global weakness in wage growth.

Given the experience of the US, where unemployment has fallen from 10% to 5%, and wage growth has picked up only marginally, it’s difficult to see this factor dissipating any time soon.

ANZ Research’s Felicity Emmett warns that markets may be getting it wrong by pushing the AUD higher on the outcome of the minutes noting that while there was no explicit bias in the minutes, this is normal practice in the press release and minutes released immediately post a rate cut.

“In our view, this does not imply that the rate cut was of the ‘one-and-done’ variety. The extent of the downgrade to the inflation forecasts in the SoMP strongly suggest that further easing is likely. That said, the discussion around the possibility of waiting for further data suggests a lack of urgency and counts against the possibility of a back-to-back cut in June,” says Emmett.

Further AUD Declines Over Four Months Forecast

The recovery in the Aussie could well be temporary in nature - we have heard from one leading analyst that the outlook for the Aussie is not constructive.

Societe Generale have actually recommended to clients that they look to profit on this expected weakness in the AUD with an AUD/USD put trade, citing four reasons for the forecast decline:

• The RBA has not finished cutting interest rates, and markets should refocus on China woes in H2.
• AUD/USD is lagging the dovish pricing of rates
• The technical picture shows vulnerability
• Long positioning is stretched.

For a detailed assessment of these four drivers, please see here.

Market Sentiment Positive = Stronger AUD

However, it is worth pointing out that much of the AUD’s gains will likely be coming in sympathy with the positive investor sentiment we are witnessing.

Like the pound, the Australian dollar is currently positively correlated to risk; when markets rise so do these risk-on currencies.

Stock markets are seen reacting to oil’s resurgence with Brent Crude a push away from reaching $50 per barrel for the first time since last November.

Fresh catalysts in the form of large and extended supply outages in Nigeria are supporting upward price momentum in oil, just when it seemed about to fade.

Canadian supplies returning to the market, after the wildfires, may contribute to a widening in WTI time spreads. Iran’s oil exports have also been recovering strongly, having touched 1.9 mb/d, now just 0.3 mb/d short of the 2.2 mb/d pre-sanction level in 2011.

Analysts argue that these unplanned outages have helped cushion some of the effect of Iran’s speedy recovery of exports.

Only four months ago, the IEA was warning that the world might “drown in oil”, while the global oil balances published by all the main statistical agencies continued to show larger and larger amounts of excess supply accumulating in 2016, up until very recently.

The message for the oil market was clear: inventory levels, already at all-time highs, would likely continue to build aggressively all the way through to year-end, with only a gradual slowing in the rate of build in the second half of the year.

However, that picture is now very different and the speed of the transition from what looked like a huge surplus just a short while ago to a market that is now rebalancing very quickly is quite remarkable.

For example, last month, the EIA’s implied global oil surplus for 2016 stood at a massive 514mn barrels, but that has now shrunk by a third, to a much more manageable 362mn barrels.

Moreover, the latest assessment of the Q2 16 surplus in the EIA’s projections has halved since its April report, falling from a projected 2mn b/d to just 1mn b/d currently.