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Will BOC Turn Dovish Like the RBA?

Last updated 12/6/2011 5:32 AM ET (GMT -5) 0 Comments - Add your comment

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• RBA cuts rate by 25bl as expected
• Swiss CPI turns negative sparking speculation of more SNB reval
• Nikkei -1.39% Europe off -0.87%
• Oil back to $100/bbl
• Gold lower to $1721/oz.

Overnight Eco

• CHF Consumer Price Index (MoM) (NOV) -0.2% vs. 0.1% eyed
• EUR German Factory Orders s.a. (MoM) (OCT) n/a

Event Risk on Tap

• CAD Building Permits (MoM) (OCT)
• CAD Ivey Purchasing Managers Index SA (NOV)

Price Action

• USD/JPY drifts lower to 77.70
• AUD/USD stabilizes at 1.0200 post RBA cut
• GBP/USD finds support at 1.5600
• EUR/USD holds at 1.3350 post S&P warning

After testing session lows at the start of European trade, risk currencies stabilized and consolidated in mid morning London dealing as traders continued to digest yesterday’s unexpected credit warning from the S&P. The EUR/USD fell to a low of 1.3340 but recovered somewhat as equities in Europe turned positive. The general lack of follow through on the S&P news which put all 17 members of the EZ on credit warning, suggests that markets are taking a wait and see attitude ahead of this Thursday’s critical EU summit meeting in anticipation that the region’s leaders will provide a more comprehensive plan towards fiscal integration. 

Earlier in Asia the RBA cut its benchmark interest rate by 25bp to 4.25%. The news was generally anticipated by the market but the Aussie fell in the aftermath of the announcement as RBA adopted a decidedly dovish tone. The central bank cited the sovereign debt crisis in Europe and precautionary behavior from firms and individuals, as key risk factors that could weigh on economic growth going forward. With respect to inflation the RBA noted that it expect price levels to remain within the 2-3 percent target in 2012 and 2013 as weather related shortages disappear and labor cost acceleration slows markedly. In short many analysts believe that the RBA left room for further rate cuts if necessary as it clearly shifted its focus away from inflation and towards growth.     

After an initial selloff, the  Aussie stabilized around the 1.0200 level  as equities in Europe turned green. As we noted earlier, “Despite the RBA rate cut, the AUD/USD remains the highest yielding currency pair in the G-20 universe and as such will continue to trade in sync with risk flows even as its rate advantage compresses slightly.”   

In Switzerland the CPI data continued to surprise to the downside printing at -0.2% versus 0.1% forecast as the high value of the franc continues exert deflationary pressures on the Swiss economy. The news immediately promoted a spike in EUR/CHF above the 1.2400 level on speculation that the SNB will revalue its currency peg to 1.2500 in response to the deflationary price data. For the time being Swiss authorities have  remained remarkably quiet as the market continues to respect its peg, but if the EZ debt crisis puts further downward pressure on European demand, Swiss policymakers will have no choice but to raise the peg in order to combat the growing deflationary trends in the region.

In North America today the focus turns to the Bank of Canada as the market awaits the central bank rate decision. The forecast is for no change in the benchmark rate, but traders will pay careful attention to the statement. Recent Canadian economic data has been mixed with the latest labor statistics showing a contraction of -18K jobs versus forecast of 20K rise. BOC officials are loathe to see the loonie trade near parity given the negative impact on exporters and therefore chance are likely that the statement will be dovish.

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.