Currency Update – Wednesday

We’ve now had two of this weeks four rate decisions and while both Australia and the US have kept their rates on hold, both do so from very different positions. The US kept their rates on hold late UK time yesterday, which was as expected, the statement that announced the decision was neutral in it’s outlook stating that ‘The Committee expects inflation to moderate later this year and next year, but the inflation outlook remains highly uncertain.’. The statement also balanced downside risks to growth with a significant concern for the upside risks to inflation. The statement has left it hard to forecast just where US interest rates will go, but they are likely to stay on hold until well into 2009, barring any shifts in the data. All of which left the Dollar roughly were it started, holding around 1.55 against the Euro, and 1.9550 against the Pound.

Australia faces a very different environment than the US. Whereas in America they have already suffered a economic slowdown and cut their rates accordingly, Australian rates are currently at a 12 year high, and the Aussie economy has been supported by strong demand and price rises for commodities. However over the past few months there have been signs of slowing in the Aussie economy and commodity prices have started to fall back. One factor that both the US and Australia have in common is higher than comfortable inflation levels, and inflation is the one reason that the RBA didn’t reduce interest rates. However the RBA did say that ‘…..scope to move towards a less restrictive stance of monetary policy is the period ahead is increasing.’, so it looks like the RBA are waiting for inflation to moderate before they start a rate cutting program. The Dovish nature of the RBA statement has sent the Aussie Dollar tumbling. It has fallen over 1c against the USD, and over 2c against the Pound, sitting just below 2.13.

Tomorrow we have the final two rate decisions with the MPC and the ECB taking their turn, and the recent news from Europe points to slowing activity. In the UK yesterday Showed a contracting service sector, and although the rate of contraction was slower than the previous month, the new orders element of the measure looked especially bad, and weak manufacturing activity. The EU looks much the same with measures of their service sector showing a contraction, and retails sales also falling drastically, 3.1% compared to a forecast of a 1.3% fall. The weak data isn’t going to change tomorrow’s decisions with inflation running above target in both economies, and it didn’t even effect the GBPEUR rate with negative data on both sides leaving the rate around 1.26.

As we wait for tomorrow’s rate decisions we have BRC retail shop price index, this is a private measure of high street prices and is likely to show that the discounting we have seen over the previous months is ending. However this figure will not change tomorrow’s rate decision and the markets are likely to wait to see where the ECB and the MPC go before taking any risky positions.

Michael Corcoran | Treasury Solutions | nabCapital