Interest Rates: Where are they Headed?
There are six central banks announcing interest rate decisions this week and two out of the six have already made their decisions official, with the Reserve Bank of Australia raising rates by 25bp and the Bank of Canada lowering rates by 50bp.
In the currency market, it is not about what you have done but what you plan on doing in the future that matters, which is why both the Australian and Canadian dollars sold off after the monetary policy meeting. Interest rates in Australia are now at a 12 year high, but that did not prevent the Aussie from falling over 1 percent against the US dollar, Euro and Japanese Yen. After raising interest rates by 100bp over the past 8 months, the RBA is pressing on the breaks while the BoC is pushing on the gas pedal. According to the statement given by Governor Stevens, domestic demand is moderating and tight financial conditions could cause growth to slow even further. In other words, it is very likely that last night’s rate hike from the RBA was their last. As for the Bank of Canada, not only did they cut interest rates by more than the market expected, but new Governor Mark Carney warned that “further monetary stimulus is likely to be required in the near term.” Despite record oil prices, Canada is growing increasingly worried that the slowdown in the US economy will have significant spillover effects, which is why they are trying to be as proactive as possible by cutting interest rates now rather than later. This has triggered a sell-off in the Canadian dollar that should last for at least the next few days. Tomorrow, the Reserve Bank of New Zealand will be making their own interest rate announcement. Unlike the RBA or the BoC, the RBNZ is not expected to alter interest rates but they are expected to remain hawkish. In addition to the RBNZ meeting, Australia will also be releasing fourth quarter GDP. A drop in retail sales and trade in the last 3 months of 2007 should hang heavily over growth, keeping near term pressure on the Australian dollar.