Overview:

• Canadian economic data noticeably stronger than Australian data in recent times.
• This is especially evident in a sharp drop in the Canadian unemployment rate in recent months, while Australian unemployment has declined only marginally. Wages and core inflation have also picked up in Canada, unlike in Australia to date.
• This – plus the lower starting point for rates in Canada – suggests less immediate fundamental flow through to implications for the RBA from the Bank of Canada’s recent moves. The RBA is likely to continue to interpret the elevated Australian unemployment rate as suggesting that spare capacity remains in the labour market.
• That said, Australia’s macro data have also improved in recent times. We remain comfortable with our forecast that the unemployment rate will begin to fall more noticeably in the first half of this year, allowing for modest interest rate increases in the second half of this year. [NAB forecasts two interest rate increases].
• Our FX strategists note that AUD/CAD is a little stronger than they would predict based on relative unemployment, interest rate spreads and key commodity prices.
• The main talking point in markets last week was continuing broad-based weakness in the US$, which has resulted in the $A continuing to appreciate – contrary to our expectations – finishing the week above US$0.81. Bond yields have remained under moderate upward pressure, with overseas yields pushed higher by rising oil prices, continuing positive economic growth indications from Europe and the US and strength in equity markets on the back of President Trump’s tax cuts.
• It is a big week ahead for Australian data, with the all-important Q4 CPI on Wednesday, following the NAB business survey on Tuesday. NAB is forecasting headline inflation of 0.75% q/q (2.1% y/y), a touch above market expectations (0.7% q/q). NAB expects core rates of inflation of 0.45% q/q (TM: 1.9% y/y, WM:1.8% y/y), broadly in line with market and RBA forecasts.
• Turning to overseas, the major economic events this week are: the FOMC, US PCE deflators, ISMs and January non-farm payrolls. In the Eurozone, it’s Q4 GDP and CPI; and in China, the PMIs. Yellen’s last FOMC is likely to result in no change to US rate policy. Despite weaker-than-expected US GDP on Friday, the market is still expecting a rate hike at the Fed’s March meeting. For the Eurozone, Q4 GDP is released on Tuesday followed by CPI on Wednesday. The market will be looking for signs of ongoing robust economic growth, following an optimistic speech by Mario Draghi last week. The week end’s with 180,000 expected for employment in January – getting back to a more robust pace – and a pace which across time, would lower the unemployment rate.

For more information, please refer to the attached report:

• Australian Markets Weekly: 29 January 2018 (PDF, 291kb)

For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets