The Reserve Bank of Australia meets tonight and new central bank governor is at the helm. Phillip Lowe, former RBA deputy governor succeeded Glenn Stevens and investors will be paying close attention to the new governor’s tone. Chances are he is going to play it safe and maintain the central bank’s upbeat outlook. The last time they convened they expressed confidence in the trend of growth and labor market. When Lowe spoke last month, he said the labor market is not as strong as the unemployment rate suggests and inflation is expected to remain low for some time. Taking a look at the table below, there has been as much improvement as deterioration in Australia’s economy since the last monetary policy meeting with broad improvements in China. So while RBA Governor Lowe may be optimistic, the main takeaway will be patience. AUD may fall on this but at a time when the central banks of the U.K., Eurozone, Japan and New Zealand are considering more stimulus, a neutral bias will make any declines shallow. In fact we believe the better trade is to be long AUD pre-RBA.
RBA meeting coming up. Here’s a table on how the Australian economy performed since the last monetary policy meeting in Feb. As you can see, there has been as much improvement as disappointment but the pullback in manufacturing and service sector activity is particularly worrisome. Market is pricing in 50bp of additional easing from the RBA this year and based on recent data, the RBA will need to remain dovish
Central banks have been particularly vocal since the beginning of the year, either by expressing their skepticism or satisfaction with the easing of credit conditions and incoming economic data. For some countries, this has changed rate hike expectations, for others it simply confirms existing views. As you may know, central bank rate hike expectations change often but here’s the latest. Find out which central banks are expected to keep monetary policy unchanged in the coming year and which ones are expected to ease below!
Federal Reserve – No Changes in 2012 (surprise, surprise)
European Central Bank – No more Rate Cuts in 2012 – upgrade from the pricing in of 25bp of easing in Jan
Bank of England – No Changes in 2012
Bank of Canada – No Changes in 2012
Reserve Bank of Australia – Mkt was pricing in 75bp of easing this yr back in Jan, now only 50bp expected
Reserve Bank of New Zealand – No Changes in 2012
And here are the details!
Central Bank Interest Rate Expectations can and do change based upon economic and market developments. The last time I provided updated CB expectations was in July (yes, I apologize for being tardy) but since then we have seen major changes in investors expect central banks to do this year and next.
Here are the cliff notes
FED – Nada for 2011 and 2012
ECB – 25bp rate cut by Dec?! (In July no rate hike or cut was expected for 2011 and 1H2012)
BOE – Nada for 2011 and 2012 but slight shift to dovish bias
BOC – Rate Cuts now expected in 2012, down from rate hike by April
RBA – Major Rate Cuts Expected – 100bp by year end?!
RBNZ – No Major Changes, Rate Hike Expected March 2012
And here are the details:
The Reserve Bank of Australia made it very clear last night that they do not plan to raise interest rates in the foreseeable future. Despite the rise in commodity prices, the RBA expressed little concern about inflation. As a result, the AUD/USD extended its losses as investors realized that unlike the ECB and other central banks who are just beginning their tightening cycles, the RBA is done.
Yesterday, I posted the following chart showing how RBA decisions can frequently mark a short to medium term top in the AUD/USD. It seems like the same scenario could be unfolding again. What do you think?
Pre Rate Decision
Post Rate Decision