Commodity currencies are in focus lately as China stimulus and Trump tariffs are being evaluated by the market. Although underwhelming expectations from investors, the programs initiated by the Chinese government appear to be having some effect on the data. That’s promising for commodity exporting countries. But that could come to a screeching halt if global trade is hurt by protectionism.
Central banks, of course, have more on their minds than just trade. And the divergence in the economies of certain commodity currencies is pushing interest rates down different paths. If the gap between them becomes wide enough, carry trades can push currency pairs far in one direction or the other. Japan is an illustration of the effects that an interest rate gap can create. With Canada and Australia’s economies tracking separate routes, the Upcoming RBA decision could have an outsized effect on their respective currencies.
RBA: Hold On For Quite a Bit Longer
With unanimous expectations of a hold, Tuesday’s Upcoming RBA rate decision is expected to be pretty straightforward after Governor Michelle Bullock’s comments last week. She said it was still a long time before inflation was expected to normalize such that the bank could be looking at changing rates. Following her comments, investors pushed forward their expectations for the first rate cut from the first quarter of next year, to the second.
This leaves the RBA in a somewhat unique position, along with the BOJ, in terms of not moving towards easing. On the one hand, the bank’s hiking cycle was more modest than others, which means other central banks have more cutting to do. On the other, this has left many economists worried that the RBA is not providing signals of easing, which could further deteriorate the economy. As a result, the Australian dollar hasn’t gained ground despite the hawkish stance of the RBA.
When To Ease
At the moment, the RBA’s position is not only no rate cuts in the near future, but a hike is still possible. Analysts are wondering when the RBA will get around to changing its stance towards easing, which could likely weaken the Aussie. Although there are several economists saying it’s time for the reserve bank to ditch the hawkish talk, there isn’t a consensus that it will happen after the upcoming RBA meeting. If it doesn’t, then the Aussie could get a bit of a rebound.
The Bank of Canada, on the other hand, has no qualms about signalling easing as Governor Tiff Macklem has falling inflation on his side when trying to tackle the slowing economy. The BOC is broadly expected to cut rates by another 50bps when it concludes its meeting on Wednesday.
Look Out Below
Economists weren’t so sure about it until Friday’s jobs data showed that the unemployment rate unexpectedly popped up to 6.8% from the already not so good 6.5%. Although there was a larger than expected number of jobs created, the participation rate also jumped, a sign that Canadians might be seeing their wallets getting stretched.
The BOC is on the opposite end of the spectrum from the RBA, being the fastest cutter of the major central banks. But, economists think that the pace will slow down going into next year, after inflation was seen rising in October. Economists think that Macklem, in delivering a large cut, might temper it with a more hawkish message during the post rate decision press conference.
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