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Over the next 24 hours, there will be 2 interest rate decisions. The first one will be from the Reserve Bank of Australia at 10:30pm ET or 3:30 GMT and the second will be from the Bank of Canada at 9:00am ET or 2:00 GMT. Both central banks are expected to cut interest rates, but the reaction to the rate cuts could be very different.
Reserve Bank of Australia: To Cut or Not Cut?
The Reserve Bank of Australia has a monetary policy decision this evening and there is a not so remote chance that they could leave interest rates unchanged. The market is looking for only a quarter point cut, which would be the smallest for the central bank since September. Comments from Reserve Bank officials have been relatively optimistic and their optimism has been confirmed by stronger economic data. Growth is positive in Australia and Australians are seeing net job growth. Before the rate decision, the current account balance for the fourth quarter and retail sales in January will be released. The improvement in the sales component of service sector PMI skews the odds towards stronger numbers. Therefore the RBA could leave interest rates unchanged, which would be a big surprise for the Australian dollar. Even if they cut interest rates, less dovish comments could drive the Australian dollar higher, particularly against the New Zealand and Canadian dollars.
Bank of Canada: Headed to ZIRP?
In contrast to Australia, Canada has been doing horribly. GDP dropped 3.4 percent in the fourth quarter, the steepest slide since 1991. Employment, consumer spending and every other aspect of the Canadian economy has been very weak. These hard times will drive the Bank of Canada to cut interest rates by 25 to 50bp on Tuesday. Given their recently pessimistic and dovish comments, we expect the larger rate cut from the BoC. Beyond that, the BoC could start talking about zero interest rates or quantitative easing, both of which would be negative for the Canadian dollar.
The currency pair that I am watching is AUD/CAD. This is always a tough one to trade, but given the diverging interest rate and economic outlooks for Australia and Canada, I expect the currency pair to break 0.82 cents and possibly make a move to 0.8350. It is certainly prime for a breakout!