[B]Talking Points
• Japanese Yen: Continues to trade around 103.00
• Australian Dollar: RBA raises but Aussie falls
• Euro: GDP in line
• Pound: PMI Construction slightly lower
• Canadian Dollar: BOC rate decision on tap
[/B]
In a classic “buy the rumor, sell the news” move, the Australian Dollar dropped by nearly 100 points in Asian and early European trade after the Reserve Bank of Australia increased its short term lending rates by another 25bp to 7.25%. The Aussie is now one of the highest yielding G-10 currencies. Nevertheless, the unit saw waves of profit taking after other data from Australia demonstrated that the extraordinarily high interest rates are beginning to dampen demand Down Under, suggesting little need to hike rates further.
Australian Retail Sales printed flat at 0.0% versus forecasts of 0.5% while the country’s Current Account deficit ballooned to a record –19.34 Billion as the high value of the currency increased imports and weighed on exports. The RBA statement while still hawkish in tone, reflected the possibility that additional rate hikes may be in question. The central bank noted that there have been “tentative’” indications that demand is slowing.
Australia has been the prime beneficiary of Chinese growth, supplying China with key commodities such a coal and metals. However, Australian economic growth has been uneven, concentrated primarily in its resource rich western regions and should Chinese demand begin to cool as a result of global growth slowdown the impact of 7.25% interest rates is likely to weigh exponentially on Australian growth going forward. The policy makers in Sydney therefore will tread carefully with respect to any additional rates hikes, especially if labor growth begins to subside. At the very least, the RBA appears to be on hold for the next several meetings as it observes the impact of its latest moves on the country’s economy. That in turn should cool some of the speculative demand for Aussie. However, if equity markets rally, the unit will find demand once again on carry trade flows.
The other commdollar economy in focus today is Canada which in contrast to Australia, has seen its economy suffer as a result of the slowdown in US. Yesterday, the Canadian economy printed the first contraction in GDP amongst the G-10 this year. That news almost assures that the BoC will cut rates today by 25bp to 3.75%. Ironically enough, these actions are taking place against the backdrop of $100/bbl oil. However, the increase in crude has not offset the spillover effects from the rapidly decelerating US economy. Furthermore, with Ottawa officials willing to tolerate an exchange rate of parity but no stronger, the rate cut should at very minimum keep USDCAD trading near the 1.00 level for the time being as Canadian policymakers attempt to aid the country’s deteriorating export position.
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[B]To discuss this article please contact Boris Schlossberg, Senior Curency Strategist: [/B][email protected]