FX Daily Strategy: APAC, February 19th

RBNZ likely to cut 50bps, still scope for AUD/NZD gains

UK CPI may tick higher, but possibly less than expected

EUR/GBP still looks stretched near 0.83

USD may rally a little on FOMC minutes with the CAD maybe the most vulnerable

Following the RBA meeting on Tuesday we have the RBNZ on Wednesday, who are expected to outdo the RBA by cutting rates 50bps to the RBA’s 25. This is fully priced into the market with a further 50bps seen by mid-year. This more aggressive easing stance from the RBNZ has led to some weakening of the NZD against the AUD over recent months, and the high of 1.1180 from November is within reach. Given the unusual situation of front end AUD yields being above NZD yields there is certainly a case for further AUD/NZD gains, especially since the RBNZ are expected to continue to ease more aggressively in the coming months.  

In Europe the main focus will be the UK CPI data for January. After the surprisingly soft December data, we think January’s CPI numbers will show some bounce back up. The 0.2 ppt rise we envisage to 2.7% is a notch below consensus and BoE thinking.  This will largely reflect more ‘noise’ in volatile services and higher energy inflation both due to fuel price rises (including a rise in the energy price cap) and base effects.  More notably, while overall inflation may drop back in the rest of the current quarter we acknowledge that the headline will spike higher in Q2 as a series of regulated prices (water bills) and energy costs (mainly gas) take effect. 

January Inflation to Spike Higher?

Source: ONS, Continuum Economics

While this may discourage the hawks on the BoE MPC from taking a more dovish view, the core inflation numbers should continue to justify easier policy.  We therefore still see 3-4 more 25 bp Bank Rate cuts this year, as the BoE reacts to weaker core inflation, and GBP may see a mild decline on the CPI data if it is in line with our expectations. EUR/GBP failed to sustain the dip below 0.83 seen after the labour market data on Tuesday, and GBP continues to look expensive against the EUR at these levels, both relative to yield spreads and more fundamentally relative to long term value.  

The only US data of note is housing starts, which are likely to fall due to bad weather in January. There may be more interest in the FOMC minutes, which are sure to indicate that there is no hurry to ease further from here. With 1 ½ rate cuts now priced in by the end of the year, the risk may be that the minutes help to cut this back to just one cut, helping the USD to recover slightly after recent losses. Scope for USD gains looks to be greatest against the CAD, where yield spreads suggest the recent rally is a little overdone despite the higher than expected inflation numbers on Tuesday.