RBA Sits Tight But Bank of Canada Moves 0.25% As Expected


The Reserve Bank of Australia met earlier today and as widely expected kept the official rate steady at 4.5%.  The tone of the statement was fairly neutral, as one might expect after 6 rates hikes since last October and increased uncertainty about the economic outlook of Europe and China.

Australia reports Q1 GDP figures first thing in the Australian morning on Wednesday.  The consensus expects a 0.6% quarter-over-quarter expansion; slower than the 0.9% pace seen in Q4 09, but near last year’s average quarterly pace (0.67%).

Inventory rebuilding is likely to have contributed more to growth than in Q4 09.  Foreign demand also looks promising as Australia reported a somewhat smaller trade deficit in Q1 10 than in Q4 09.  Despite relatively healthy job creation, it has not spilled over to help consumption very much.  Over the quarter, retail sales rose 0.5%.  In Q4 09 retail sales rose 1%.

The Australian dollar is not being driven by its high interest rates,  The steep 13.5% loss recorded from April 30 through May 25 seems largely a function of the unwinding of risk trades, like long AUD short JPY.

Within our constructive view of the dollar bloc in general, given that the Australian interest rate cycle is mature, we have suggested that the Canadian dollar, which hiked rates today for the first time, may out-perform.  Some observers emphasize the pullback in China’s PMI today (though another PMI was firmer), but we think the China story is still a net positive for Australia.

After falling to $0.8282 earlier today that Aussie bounced to $0.8437 in the North American morning, as the equity market recovered, illustrating the "real" driver of the Australian dollar.  Intra-day technical readings are over-extended.  Support is now seen near $0.8350.


Meanwhile, the Bank of Canada hiked its overnight target 25 bp to 0.50%, as widely expected.  A Reuters poll showed all primary dealers expected it and expect a hike at next month’s meeting as well (July 20).  However, the Bank of Canada’s statement is somewhat more neutral,   The BOC also took measures to restore the normal operating band to 50 bp.

The uneven economic recovery globally and what the BOC called "the possibility of renewed weakness in Europe" is one of the factors that might give the central bank pause.   Given the substantial uncertainty surrounding the global outlook, the BOC cautioned "any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments."                                                         

This would seem to suggest the bar for a July hike is an easing of the tensions in the global capital markets.  The Canadian economic recovery is unfolding thus far in line with policy makers’ expectations.  The Bank of Canada notes that policy is still accommodative.  On a trade weighted measure, the 7% decline in the Canadian dollar since mid-April also imparts some degree of accommodation as well.

Initial resistance for the US dollar is seen near CAD1.0550-60.  A  move above there could see CAD1.0720-40.   Last week’s high was set on Tuesday near CAD1.0850.      Support is seen near CAD1.0460.

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