RBA: VIEW: Softer Inflation Outlook Drives Westpac’s Rate Forecast Down
While Westpac continues to expect the RBA to be on hold in July with the next cut in August coinciding with updated staff forecasts, it is now forecasting the trough in the cash rate at 2.85% in May although it could be March if inflation and the labour market disappoint. It estimates that is the lower end of the “neutral” range. Westpac then forecasts 25bp in November 2025, February 2026 and May 2026.
- Westpac’s downward revisions to inflation further out have driven the revision to its monetary policy outlook. Q2 was revised up 0.2pp to 1% q/q and trimmed mean 0.8% q/q due to higher medical services and dwelling prices.
- However, its Q4 2025 forecast is unchanged at 3.4% y/y and trimmed mean is down 0.1pp to 2.7% y/y due to weaker domestic and global demand. Q4 2026 trimmed mean has been revised down 0.2pp to 2.3% y/y, below the mid-point of the band.
- In terms of July, Westpac notes that “the Board described itself as having a preference to move cautiously and predictably. This is code for not wanting to do back-to-back cuts. It also made it clear in the minutes that this was about reducing restrictiveness.”
- “The May labour force data out next week is likely to show a labour market that still looks tighter than the RBA’s view of full employment. And while the May monthly CPI indicator, to be published on 25 June, is likely to be a low one, the steer from April and May suggests that June quarter CPI is likely to be a bit above what the RBA is forecasting.”
- “A ‘shaky handover’ from the post-expansion normalisation in the care economy and the completion of a raft of state government infrastructure projects could weigh on both output and employment.”
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CNH: USD/CNH Hits Fresh YTD Lows Post CNY Fixing & Trade Optimism
USD/CNH has traded to fresh lows under 7.1800, which is a YTD low in the pair. We last traded around these levels in Nov 2024. In terms of levels to be mindful of as potential downside targets - the Oct 29 high from last year was 7.1642, while we had some lows near 7.1400 post the US election result last year.
- CNH sentiment has been buoyed post the CNY fixing result, which delivered a sub 7.2000 outcome, which the market took as further signal for yuan gains. The fixing error was also tighter despite higher USD index levels overnight.
- USD/CNY spot is also sub 7.1900 but above 7USD/CNH levels at this stage.
- The yuan continues to enjoy positive sentiment post the better than expected trade meeting results from the weekend.
- Focus will be on follow ups, with US President Trump stating he may have a call with China President XI Jinping this week. Onshore China media stated that: "China is willing to continue trade talks with the US based on the positive outcomes from the meeting in Geneva, even though the road ahead may be bumpy, according to a commentary by People’s Daily, the flagship newspaper of the Chinese Communist Party." (via BBG).
JGBS AUCTION: PREVIEW - 30-Year JGB Auction Due
The Japanese Ministry of Finance (MoF) will today sell Y800bn of 30-Year JGBs. The MoF last sold 30-year debt on 8 April 2025. The auction drew cover of 2.9582x at an average yield of 2.414%, an average price of 99.75, a high yield of 2.457%, and a low price of 99.00, with 33.8235% of bids allotted at the high yield.
- Last month’s 30-year bond auction delivered disappointing results. The low price fell short of dealer expectations, according to a Bloomberg poll. Additionally, the cover ratio declined to 2.9582x from 3.4997x and the auction tail widened significantly to 0.75 — the largest since 2023 — up from just 0.12 previously, all pointing to noticeably weaker demand.
- Today’s supply also follows a 10-year JGB auction, which delivered weak results. The low price fell short of expectations, the cover ratio decreased to 2.5440x from 3.1475x, and the tail lengthened to 0.18 from 0.11.
- Results are due at 0435 BST / 1235 JT.
USD: BBDXY Breaks 1230, Shorts Pared Back
The BBDXY range overnight was 1228.08 - 1241.71, Asia is trading around 1238. The USD has retraced a little in early Asian trading but has managed to hold onto most of its overnight gains, price action shows the market was not expecting such a positive outcome so quickly.
- Momentum Fund orders are being triggered in US stocks and this looks to be causing some pain to a market that has been positioned generally underweight.
- This has direct implications for a market that is similarly positioned short the USD.
- There has been a growing consensus that the USD is set to embark on a decent move lower as the world reduces its exposure to the US and repatriates a lot of these flows.
- JP Morgan via BBG - “We continue to see ongoing vulnerability of capital outflows in the US as foreign interest and trust are tested, while the US is still carrying massive debt and deficits that the political class will not be able to solve in the very near term”
- Resistance in the BBDXY around 1230 was broken convincingly overnight and this triggered a wave of buying as shorts were pared back. It looks like we could head back to the 1250 area as the USD shorts conviction is tested but feel sellers should materialise back towards there as all the reasons to be short are still there.
Data : US CPI
Fig 1: BBDXY Daily Chart
Source: MNI - Market News/Bloomberg
