AUD better bid amid optimistic RBA
As widely anticipated the Reserve Bank of Australia left the cash rate target unchanged at record low 1.50%. As usual the statement was quite balanced as Philip Lowe wants definitely to avoid fuelling further Aussie appreciation. On the one hand, Governor Lowe acknowledged the improved economic conditions, more specifically the solid growth in employment across all states as well as the continued pick-up in non-mining investment and strong business conditions. On the other hand, the Governor reiterated that the appreciation Aussie over the recent months creates downside inflation risks, adding that “It is also weighing on the outlook for output and employment.”
Overall, in spite of the fact that the statement is mostly unchanged compared to the previous one, the Australian dollar edged slightly higher on Tuesday with AUD/USD spiking at $0.7985 during the Asian session and then stabilised at around 0.7960 in early European session.
It did change the outlook for the Aussie and we believe that a healthy downside correction would be more than welcomed. However, the AUD/USD’s strength is mostly due to a US dollar weakness rather than a strong Aussie, thanks to an uncertain USD outlook. Indeed, investors are largely clueless about the Federal Reserve next move on September 20th, while on the political side Trump keeps failing to persuade Congress to adopt his reforms. Therefore, we think the pair will trade sideways over the next couple of weeks. Also keep in mind that an excessive dovishness from Draghi on Thursday could ignite a broad dollar rally.
Not too early for BoC to hike
Given the solid pick up in the Canadian economy the likelihood that the Bank of Canada rises interest rates by 25bp Sept 6th policy meeting has increase significantly. Exemplified by the strong 2Q GDP report, which indicated at 4.5% growth rate, the economy has expanded past the BoC projections. Improvement in the labor markets and housing suggest that inflation will further build. The Canadian economy has been expanding at an accelerating pace, forcing committee members to overlook current subdued inflation reading and adjust monetary policy today. Rather then, get caught behind the curve.
Risk in CAD are now asymmetrical as a no change but upbeat communicators will support CAD downside (keeping rate hike by year-end intact). However, a hike will indicate the BoC commitment, raising the markets expectations for additional BoC tightening. BoC interest rate expectations and yields spreads favoring Canada has been a driver of CAD pricing rather than crude prices. A hike would bring in short-end yields and propel CAD higher against the USD.
