AUD and CAD take different routes

Governor Carney did what was expected and kept Canadian rates on hold (+1%) this morning. The accompanying statement was a tad surprising, less dovish than expected. The fact that the Bank mentioned that there was “considerable monetary policy stimuli” in place, coupled with policy makers noting that CPI would run a tad higher than forecast and that they see US growth “slightly more robust than foreseen’ has helped the CAD to outperform most of the other major currencies today.

Fixed Income traders have trimmed future rate expectations. They had almost fully priced in a -25bps rate cut by next June, but this has been pared to +80% after the Bank stood pat and sounded less dovish than expected. Another reason for the firmer tone for the currency is the underlying story of the CAD in demand for safe-haven flows in light of AAA rated countries elsewhere under pressure from S&P. Canada is seen as an investor’s refuge from the Euro crisis without the risk of US budget deficit and political deadlock. The loonie has been the best performer in the past month outright amongst the most-traded currencies. It’s expected that Carney will be the only central bank leader in the G10 to raise interest rates next year. This is on the back of inflation having exceeded the Bank’s+2% target for eleven-months as the economy grows at double the pace of the G-7 nations.

Other data handily beat market expectations. Canadian Ivey PMI was at 59.9 seasonally adjusted last month vs. 54.4, indicating that purchasing activity has again expanded. Disappointing however was the sub-category employment index print of 49.4, indicating that employment was lower than in the previous month. Last week, Canada reported losing -18.6k jobs in October and the unemployment rate ticking up to +7.4%.

Over the past few sessions the loonie remains handcuffed to EUR headlines, tightly trading in its own range. Currently, the currency seems well supported above 1.0220 and with resistance below 1.0100. Expect the currency to trade close to this range until the market gets a clearer picture of Euro intention by weeks end.

The RBA took a different route from its sister growth sensitive currency, the loonie, last night. The Aussies kicked off this Central Bank rate decision week with an expected-25bp ease (+4.25%). It’s their second consecutive cut, and issued a relatively dovish statement. Governor Stevens stated that “financing conditions have become much more difficult, especially in Europe.” He went on to say that “this, together with precautionary behavior by firms and households, means that the likelihood of a further material slowing in global growth has increased”. Interestingly thought, the statement gave no indication of whether the RBA thinks that monetary policy is now appropriate. In contrast, the statement seemed to focus on external risk and downplayed inflation concerns. Overall, the market seems to have taken it as a reasonably dovish statement consistent with another cut in the first quarter. The Governor’s message seems to be the same being expressed from other emerging countries who are also considering adjusting their rates.

However, a percentage of traders were in the “no rate cut” camp, so carry traders are a tad disappointed by the RBA cut. Another rate cut would certainly dampen real money expectations of a carry gain. As such, real money sellers are happy to be on the offer on momentarily rallies. Investors are increasing their bets on further reductions in borrowing costs. Interest-rate swaps (pegged to RBA policy meeting dates) show traders expect Stevens to ease by a further-100bps point by May. With China being Australia’s largest trading partner, Governor Steven’s noted that “China’s growth has been slowing,” and that “trade in Asia is now, however, seeing some effects of a significant slowing in economic activity in Europe.”

Euro troubles have been weighing on the AUD in recent months. The currency has fallen-8.2% since its peak on concern Greece would default and trigger a repeat of the 2008 credit freeze. A dovish central bank will have more sellers appearing on the topside short term. With the BoC standing pat, the loonie is expected to outshine its commodity growth sensitive ally (1.0354).

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