FX Hedging Trends

• This week’s Australian focus is very much on the release of Q1 CPI and any implications for RBA monetary policy that might flow from this. NAB’s forecast is for a 0.4-0.5% q/q outcome for both the headline CPI and the more important core rates of inflation.
• Our full preview note released on Friday shows a slight tick-up in core inflation is broadly occurring as a result of higher rents, higher petrol prices and the influence of a higher lagged headline CPI. (Interesting research from the IMF recently noted that the main reason for lower core inflation globally in recent times was due to lower core services inflation since the GFC, not lower core goods inflation).
• Together these influences place the annual core rate of inflation just below 2%. With inflation still below the RBA’s 2-3% medium-term target, little momentum evident in the official wages figures and the unemployment rate still around half a percent above the NAIRU of 5%, the RBA Board continues to see no strong case for a near-term adjustment of monetary policy as revealed in last week’s April Board Minutes.
• That said, the NAB Quarterly Business Survey continues to reveal an increase in the number of firms reporting increased difficulty sourcing suitable labour, which suggests the conditions are falling into place for some lift in wages growth.
• The other Australian events of note this week are a speech from RBA Assistant Governor Chris Kent on Tuesday morning on “The Limits of Interest-Only Lending” and the ANZAC Day public holiday on Wednesday.
• Markets meanwhile continue to see bond yields generally under upward pressure, no doubt in part reflecting continuing rises in oil and other commodity prices. Rising bond yields have been a headwind for global equities however, the main story has been recent weakness in some high-flying technology stocks. Aussie equities have outperformed due to support for resource companies.
• The US$ has strengthened as the US yield curve has bear steepened, seeing most other currencies including the $A broadly weaker. NAB continues to expect modestly higher bond yields and swap rates and a modestly lower $A over the next six to nine months.
• This week, our FX Strategists look at some of the changes in the FX hedging policies of corporate Australia, the data drawn from the NAB quarterly business survey.
• In Q1, importers further lengthened their average hedge tenors, at 8.7 months now the longest in the survey’s history
• Average exporter hedge tenors also rose in the March quarter, but at 9.5 months are only now in line with their long run averages, though are longer than in recent times.

For further details, download the full report:  Australian Markets Weekly: 23 April 2018