CPI FALL FUELS RATE CUT EXPECTATION - OUR CALL NO CUT

The March quarter CPI fell 0.2% for the March quarter against market expectations sending the Australian Dollar tumbling down by almost a cent to US 76 cents as the market now expects the RBA to cut rates tomorrow. The CPI fell for the first time since the GFC in 2008. The fall in March was mainly attributed to fall in fuel prices. 
On a year on year basis, the CPI went up by 1.3% and well below the RBA's target 2-3% which has fueled market expectation that the RBA will cut rates tomorrow. We are of the view that the RBA will hold rates steady because of several factors:
1. The reluctance of the US Fed not delivering rate rises due to global economic concerns. 
2. The fall in CPI numbers was mainly due to fall in oil prices. Oil prices have fallen sharply in January and February but have gone up in March. Brent crude was at USD 28.94 a barrel on 15 January whereas it was trading at 47.37 on 29 April. 
3. Whilst the RBA wants the value of the AUD to fall, it does not want the household debt levels to grow. 
4. The Commodity prices are on an upward trend. 
In view of these, we still hold the view that the RBA will "hold" the rates steady and will move perhaps when the US Fed does in fact hike rates which will result in a fall in the AUD and perhaps wait for clear indication from the market that the price index is on a downward trend after the June quarter result. In particular, the transport sector fall will be counter balanced with the increase in oil prices since January 2016 which will mean that the June quarter will not be impacted by similar falls as in March quarter. 

MARKET DATA 

​Australia Cash rate
Australia 90 day bank bill
Australia 10 y bond
US 10y Govt bond
AUD/USD
AUD/EUR
AUD/JPY
AUD/CNY
ASX 200
S&P 500
Dow Jones
Shanghai Composite
Brent Oil (USD per BBL)
Gold Spot (USD per oz)
"Iron Ore 60% MBIOI-IR index
USD/t (Updated Wednesday)"

As at 29 April
​2.00
2.27
2.51
1.83
0.7655
0.6721
82.15
4.957
5,252
2065
17,773
2938
47.37
1293.53
60.97

As at 22 April
2.00
2.27
2.63
1.89
0.7762
0.6871
85.64
5.0357
5236
2,091
18,003
2,959
45.11
1233.03
57.27