From ANZ:
AUD IS SPENDING ITS FINAL DAYS ABOVE 80 CENTS
• Central banks are surprising markets on a more consistent basis — with the Bank of Canada (BoC) the latest to cut rates.
• The BoC decision has relevant parallels to Australia — namely, a commodity-centric economy with growth slightly below-trend and an inflation pulse that is providing space for some additional easing.
• Soft data outcomes in Australia next week (business confidence and the CPI) will raise risks that the RBA will act sooner than the market expects, and implies the AUD won’t be above USD0.80 for much longer.CENTRAL BANK ACTION IS BECOMING HARD TO IGNORE
Overnight, the Bank of Canada (BoC) joined a fastgrowing list of central banks which are easing rates. In recent weeks a number of them have moved in a dovish direction — the Swiss National Bank, the Reserve Bank of India, and Bank of Peru have all surprised markets. This list also broadens rapidly if one looks back into Q4 2014, where the Norges Bank and the Central Bank of Chile (among others) also eased, and the Bank of England backed away from its tightening bias.THE BANK OF CANADA DECISION IS OF PARTICULAR INTEREST FOR THE AUD
The decision from the BoC is notable for the AUD given both the CAD’s status as a commodity currency and the fact that the BoC decided to ease into an environment in which the broader macro case for a cut was not entirely clear cut. The Bank said: “Outside the energy sector, we are beginning to see the anticipated sequence of increased foreign demand, stronger exports, improved business confidence and investment, and employment growth. However, there is considerable uncertainty about the speed with which this sequence will evolve and how it will be affected by the drop in oil prices.”Further, “the Bank is projecting real GDP growth will slow to about 1 1/2 per cent and the output gap to widen in the first half of 2015…(but)…Canada’s economy to gradually strengthen in the second half of this year, with real GDP growth averaging 2.1 per cent in 2015 and 2.4 per cent in 2016.”
While the Canadian economy has far more leverage to the negative impact of the decline in oil prices, when considering the peak to trough move in key commodity prices since 2010, the fall in oil is actually matched by the decline seen in iron ore (around 65%).
As such, the terms of trade impact of the move is relatively similar. Further, when considering that oil is 22% of Canada’s export basket, compared to iron ore and coal, which makes up 34% of Australia’s merchandise exports, one can actually see a lot of parallels in this case to Australia.
