Forex Investment and Currency Trading

The RBA met market expectations by leaving its policy rate unchanged at 3.00% today, but its accompanying statement was more dovish than the market was looking for. In particular, the RBA said “… that scope remains for some further easing… , if needed”, adding that the “… Board will continue to monitor how economic and financial conditions unfold”. The market was looking for the RBA to potentially rein in the prospects of further rate cuts.

We think the RBA is trying to manage market expectations and avoid a further significant steepening in the yield curve, which could lead to higher local lending rates and a premature tightening in monetary conditions. The RBA is also allowing for deterioration in Australia’s domestic data. We continue to think that a rise in the unemployment rate will lead to 50bp of further rate cuts, but the recent strengthening in China’s economic data has reduced our conviction behind this call. We think these rate cuts will not occur until late in Q3.

The AUD continues to be driven mainly by commodity prices and equity markets, with upside surprises in local events tending to only reinforce the currency’s upward trend or, in the case of the RBA today, briefly denting this trend. The next big local event for the AUD will be tomorrow’s Q1 GDP release, where we think the economy could dodge a technical recession and record 0.1% q/q real GDP growth. The most recent Reuters poll median forecast calls for 0.2% growth.

CHF: Q1 GDP better than expected

In Q1 09, real Swiss GDP (sa) declined by 0.8% q/q, which was better when compared with the market estimate. Looking at the breakdown, the weakness was primarily driven by a sharp drop in exports (-5,4% q/q). In contrast domestic demand actually expanded 2.2% q/q. Even though the Q1 data are better than expected, it still represents the third consecutive quarterly decline in GDP and the downward revision to Q4 partly offsets the good news from the Q1 data. The focus for the market now turns to the CPI inflation data for May on Friday, which is an important factor behind the commitment of the SNB to prevent Swiss franc appreciation. Market expects a small monthly rise of 0.3% but a new low for the annual change (-0.9% y/y).