Even though the Reserve Bank of Australia and the Bank of Canada both decided to keep interest rates unchanged in their monetary policy statements this week, one central bank sounded way more dovish than the other. Which one is it? And how might this affect forex price action?
Reserve Bank of Australia
Although most forex market watchers anticipated another 0.25% rate cut from the RBA, Governor Glenn Stevens and his men decided to sit on their hands for the time being, citing that they’d like to assess the impact of their February rate cut first before taking more action.
So far, it seems that RBA policymakers are no longer as concerned about low inflation and weak hiring as they used to be. However, Stevens still pointed out that the economy is likely to operate under a degree of spare capacity, especially since wage growth has remained feeble. He also didn’t pass up the chance to jawbone the currency, emphasizing that the Aussie is overvalued in terms of fundamentals and that a lower exchange rate level could help achieve more balanced growth.
But here’s the kicker… Stevens actually hinted that they might cut rates again! “Further easing of policy may be appropriate over the period ahead in order to foster sustainable growth in demand and inflation consistent with the target,” he admitted. For now, policymakers are concerned that consecutive rate cuts might lead to a housing market bubble, but analysts could continue to price in expectations for further easing in the next RBA decisions.
Bank of Canada
No surprises from the BOC this time! As expected, Governor Poloz and his gang of policymakers decided to keep interest rates on hold at 0.75% and confirmed that the current level of monetary stimulus is appropriate. Compared to their previous rate statement, BOC officials seemed more optimistic this time since they pointed out that downside risks to inflation have subsided.
The official statement also noted that improving financial conditions are helping counteract the negative effect of the oil slump on the Canadian economy, as growth and investment in other non-energy sectors are being supported. Besides, crude oil has shown a bit of a rebound so far this year, suggesting a potential recovery for Canada’s export industry.
Unless another oil price shock happens within the next few months, analysts say that the Canadian central bank is likely to maintain a neutral to hawkish stance. After all, growth in Canada is also being supported by the U.S. economy, which is gaining momentum on its recovery.
With that, the Loonie is likely to regain more ground moving forward while the Australian dollar could be in for more losses, especially as the next RBA monetary policy statement draws near. Bear in mind that China’s central bank recently cut interest rates, which basically means that the world’s second largest economy and Australia’s number one trade buddy is foreseeing more weakness. Got any trade ideas based on these potential forex trends?