As expected, the Reserve Bank of Australia cut rates by 25bps to 7.00 percent on Monday night, sending the Australian dollar for a freefall below 0.8500. The move marked the first reduction to the cash rate since December 2001, despite the fact that RBA Governor Glenn Stevens said in his policy statement that “inflation is likely to remain relatively high in the short term.”
Nevertheless, Mr. Stevens left the door open to additional cuts, noting that it is “more likely that household demand will remain subdued and overall economic growth slow,” allowing the Monetary Policy Board scope to make monetary policy “less restrictive.” AUD/USD could drop further overnight as Australian Q2 GDP is scheduled to be released and is forecasted to slow to an annualized rate of 2.9 percent from 3.6 percent. Meanwhile, the Canadian dollar faces heavy event risk on Wednesday morning as the Bank of Canada will announce their rate decision. A Bloomberg News poll shows that 27 of the 28 economists surveyed expected the BOC to leave rates steady at 3.00 percent (1 forecasts a 25bp cut). My view? The BOC will leave rates unchanged, but the key to trading USD/CAD will be the policy statement. Headline CPI remains extremely strong, but core prices remain contained. Meanwhile, growth has held up fairly well despite the slowdown in the US, but it is clear that there are significant downside risks to the economy going forward. Overall, though, the statement may reflect a slightly hawkish bias by the BOC’s Governing Council, which could contribute to some Canadian dollar strength on Wednesday.
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