FX Weekly: Trive’s Week Ahead Insights
This week highlights include the inflation reports from the US and China, while the FOMC minutes will also be eyed, as will the RBNZ rate decision. UK GDP and Japanese Cash earnings will also be key.
Japanese Cash Earnings (Mon):
There are currently no expectations for the Japanese Cash Earnings metrics, although the data will be watched by the BoJ for the wage trend. As a reminder, last month’s release saw Japan’s real wages fall 1.8% year-on-year in January, as rising inflation—at a two-year high of 4.7%—outpaced solid nominal wage growth. While regular and overtime pay saw their strongest gains in decades, a drop in bonuses dragged overall nominal earnings lower.
Japan’s largest Labour union group, Rengo, secured an average 5.46% pay hike in this year’s spring wage negotiations — the biggest since 1991. Base pay rose 3.84%, and even smaller firms saw stronger gains, signalling broad wage momentum. In the latest BoJ rate decision, the central bank provided no surprises at this week’s meeting as it maintained rates at 0.50% which was widely expected, given that the central bank just hiked at the last meeting in January, while the decision on rates was made unanimously. The central bank refrained from providing any major clues on policy in which it noted that Japan's economy is recovering moderately, albeit with some weak signs, and that consumption is increasing moderately as a trend and inflation expectations are also heightening moderately.
FOMC Minutes (Wed):
At its March meeting, the Fed kept rates unchanged, as expected, and maintained its forecast of two rate reductions in 2025. It removed language from its statement suggesting risks to its goals were balanced, citing increased uncertainty. However, it reiterated that "economic activity has continued to expand at a solid pace," labour market conditions "remain solid,", and inflation "remains somewhat elevated." However, it did add that “uncertainty around the economic outlook has increased.” Its 2025 and 2026 growth projections were lowered, with higher unemployment, and it lifted its PCE inflation forecasts. It also announced that starting April, the pace of balance sheet runoff will slow, reducing the monthly Treasury redemption cap to USD 5bln (from the current USD 25bln), though the MBS cap remains unchanged at USD 35bln.
Analysts were not very surprised by the announcement, given the use of its reverse repo facility has declined significantly this year. The prior meeting minutes also alluded to a slowdown of the balance sheet runoff, although the March meeting was not explicitly signalled by policymakers. The projections also showed that FOMC members are divided on the number of cuts in 2025; the dot plot continues to show two rate cuts this year, and projections for 2026 and the long-term forecast were left unchanged, but four participants now expect rates to be unchanged in 2025 (vs just one previously), and four members expect only one rate cut. In his press conference, Chair Powell stressed a wait-and-see approach, emphasising uncertainty ahead. He noted rising short-term inflation expectations but highlighted that long-term expectations remain stable. Powell acknowledged tariffs contribute to higher goods prices but are hard to quantify in terms of inflation. He said the Fed could either cut or hold rates at a "clearly restrictive" level.
On the balance sheet, he clarified that the slowdown in runoff was a technical adjustment, not a policy shift. He also clarified that removing the language about balanced risks was not a signal. Since the meeting, markets have been rocked by the US tariff announcements this week, which analysts said have the potential to lower the US growth trajectory while boosting inflation. Reports note that the tariffs imposed by President Trump create a challenging environment for the Fed, complicating efforts to control inflation and prevent a recession. Bloomberg said it might lead to a cautious approach by the central bank as it monitors the economic impact before taking further action. Still, money markets began to discount four 25bps rate reductions this year following the announcement. Morgan Stanley, however, has leaned back on this, with the bank scrapping its call for a June Fed cut after Trump's tariff announcement, as a result of "tariff-induced inflation," and now sees the FOMC on hold until next March. MS said that if tariffs persist, US economic growth may suffer, with downside risks increasing.
RBNZ Announcement (Wed):
The RBNZ is expected to cut rates for the fifth straight meeting with a Reuters poll showing all 31 economists surveyed expect the Official Cash Rate to be lowered by 25bps to 3.50%. Money markets are pricing in a 97% chance for such a move and just a 3% probability for a greater 50bps cut to 3.25%. The meeting will be the first in the post-Orr era after former Governor Orr suddenly resigned in March, three years before his term was set to end, while Deputy Governor Hawkesby was appointed as Acting Governor until a new Governor is appointed which is said to likely to be a six to nine-month process.
As a reminder, the RBNZ delivered a third consecutive jumbo 50bps rate cut and its fourth straight rate reduction at the last meeting in February, which was widely expected, while the central bank noted rates were reduced further as inflation abated and if economic conditions continued to evolve, there was scope to lower the OCR further in 2025. The RBNZ also stated that the committee has the confidence to continue lowering rates and economic activity remains subdued but noted that a recovery is expected over this year. Furthermore, the central bank cut its rate projections with the June 2025 forecast lowered to 3.45% from 3.83% and the March 2026 forecast was cut to 3.10% from 3.43%.
The then Governor stated during the press conference that the OCR path projects 50bps of cuts by mid-year around July, in two 25bps steps, with cuts in April and May about right. Orr also commented the following day that he was feeling more positive about the inflation situation and expects the OCR will be around 3.00% by year-end, as well as noting there would have to be an economic shock to cut by 50bps again. Despite Orr’s departure, the remaining six members of the MPC are unlikely to deviate from the signalled rate path with rhetoric from officials very light since the last meeting, while recent GDP data also showed New Zealand’s economy exited a recession in Q4 which suggests the lack of urgency for another oversized rate cut.
Chinese Inflation (Thu):
There are currently no forecasts for the Chinese inflation data. Typically, the data will be closely watched by markets for a prognosis of the world’s second-largest economy, particularly with sluggish domestic demand continuing to be a grey cloud. That being said, this set of data will likely be stale given US President Trump’s recent “Liberation Day” tariff announcement which resulted in 54% in cumulative tariffs from 20%. China's Commerce Ministry said China firmly opposes US reciprocal tariffs and will resolutely take countermeasures to safeguard its rights and interests, while it urged the US to immediately cancel unilateral tariff measures and properly resolve differences with trading partners through equal dialogue. Goldman Sachs believes the latest US tariffs would further drag China's GDP growth by around 1 percentage point, taking the total drag to 1.7 percentage points.
US CPI (Thu):
Analysts expect headline US CPI to rise 0.2% M/M in March, matching the February reading; the core rate of inflation is seen climbing by 0.3% M/M, picking up from the prior pace of 0.2%. However, the market may not be as sensitive to the data as it has been in recent months, given the US announcement of tariffs on trading partners has the potential to boost prices ahead, analysts have said. "The March CPI data will feel dated following President Trump's announcement of significantly larger tariffs across trading partners, but should shed some light on how the changing trade environment was already beginning to affect pricing," Wells Fargo writes, and while it thinks that March could mark the nadir in core inflation this year, the administration's efforts to reorient US trade could lead to faster price growth.
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