FOREX TRADING

RBA holds rate policy steady

The Reserve Bank of Australia (RBA) elected to keep rate policy steady at 4.5%. A steady RBA rate decision was widely expected. In its policy statement accompanying the rate decision the RBA said that policy was appropriate for the near-term. The RBA policy statement indicated that RBA officials were focused on the EU debt crisis. The RBA policy statement noted concern about sovereign credit worthiness in several European countries and that because of this concern equity prices and long-term bond yields have been declining and the AUD posted a sharp decline. The RBA noted the effort by European policymakers to address the EU debt crisis agreeing to a large aid package and renewed commitment to bring down the deficits. The RBA expects global growth to be close to trend in 2010 and said that the recovery is becoming more established in North America and growth in Asia remains quite strong. The RBA also stated that output growth in Australia will likely be above trend and that inflation could be near the upper half of the central bank’s target zone. The RBA gave no clues whether interest-rate policy will be changed anytime soon. In its policy statement the RBA noted that there is a little more uncertainty because of the debt crisis in Europe. The RBA appeared to signal that rates may remain on hold for some time to come. The AUD was trading lower ahead of the RBA policy announcement pressured by weaker equity markets and report of weak PMI data from China. AUD downside was partly limited by the fact that the RBA policy statement was seen as neutral. There had been speculation that the RBA policy statement would have been more dovish. The RBA was the first central bank to begin hiking rates back in November. The recent RBA rate hikes mean that the RBA is ahead of other major banks in its rate hike cycle. The EU debt crisis may encourage a longer pause in the RBA’s tightening cycle.

BOC hikes rates 25bps

The Bank of Canada (BOC) raised interest rates 25bps to 0.50%. The rate hike was widely expected with all the Canadian dealers expecting today’s rate hike. There had been some doubt from a few analysts about whether the BOC would follow through with a rate hike because of the European debt crisis but the BOC has emerged as the first G-7 central bank to hike rates since the December 2007 financial crisis. According to the statement accompanying the BOC policy decision the BOC recognizes that the global recovery remains uneven noting strong growth in emerging markets, some consolidation in the US and Japan and renewed weakness in Europe. The BOC went on to state that the EU debt crisis will result in higher borrowing costs but the impact of events in Europe have been limited to a modest decline in commodity prices and some tightening of financial conditions. The BOC based its rate decision on the fact that economic growth in Canada accelerated at a faster pace in Q1 led by housing demand and consumer spending and improved employment growth. Canada’s inflation remains in line with the banks April projections. The BOC concluded its policy statement noting that there is considerable uncertainty about the outlook going forward as monetary stimulus is reduced and the central bank must balance domestic considerations versus global economic developments. CAD was trading lower ahead of today’s BOC policy decision pressured by weaker equity markets, EU debt fears and concern about slowing growth in China. CAD remained on the defensive after the BOC rate hike announcement as the BOC left its options open in regard to future monetary policy decisions.

The tone of today’s BOC policy statement contrasts with the RBA policy statement. The BOC stated that the risks from Europe do not change the imbalances that brought on the credit crisis. This may be a BOC warning that other central banks and governments should not maintain easy monetary policy or fiscal policies indefinitely. The BOC gave no indication whether more rate hikes are to be expected in the months ahead. We expect another BOC rate hike before year end. Based on today’s RBA and BOC policy statements we conclude that the RBA is more concerned about the fallout from the EU debt crisis than the BOC. If our conclusion is correct the CAD may continue to outperform the AUD.

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