Forex Investment and Currency Trading

AUD: RBA Stevens stops short of changing policy bias

In a speech on “Challenges for economic policy” RBA Governor Stevens stopped short of explicitly shifting the RBA’s policy bias (currently a modest easing bias), but was more upbeat on both the global and local economies. This led to a sell-off in local bills and gave the AUD a lift. The currency was also given a boost by Governor Stevens’ comment during the Q&A session that “… (there is) no rule that (the RBA) would wait for unemployment to peak before raising rates…” Many market economists forecast the unemployment rate to peak in late 2009 or early 2010 and that this could delay the beginning to the RBA’s rate tightening cycle. 

Next week’s MPS may be the forum where the RBA more explicitly spells out its current policy bias. Until then, the more upbeat rhetoric from Governor Stevens will give the AUD a modest boost, particularly against the NZD and ahead of the RBNZ’s rate decision this Thursday. The AUD will likely need assistance from stronger commodity prices and equities in order to drive significantly higher against the G3, however, given that Governor Stevens did not explicitly spell out a shift in the RBA’s policy bias.

WSJ: Fed may have to raise rates sooner rather than later - Plosser

Philly Fed President Plosser also commented about the possibility of tightening policy while unemployment was still high. He was reported to have said to the WSJ/DJ, “I think we will probably have to begin raising rates sometime in the not-too-distant future”. He commented that while inflation was not a short-term threat, it could be a risk in late 2010 and 2011, noting that in the 1970s the US experienced inflation even with high unemployment. However, his comments are likely to be less market moving than RBA’s Steven’s, as Plosser is widely considered to be one of the “regional hawks” on the FOMC and is not currently a voting member. In the past, Mr Plosser has occasionally dissented from the FOMC (dissents are comparatively rare) and in his public comments have tended to express concern that the US monetary and fiscal stimulus might prove too much, and to express concern about an adequate exit strategy.

HUF: Central bank cuts by more than expected

The MPC lowered its policy rate yesterday to 8.50 (from 9.50) where the consensus had been expecting a 50bpcut. The rally in the Forint and the recent rise in foreign investor appetite for local bonds have clearly given the MPC the courage to cut rates by more than expected. The high rollover ratios on local banks’ external debt seen so far this year and the generally positive sentiment are supportive but there are risks associated with the central bank moving too fast. In the near term, local rates and the Forint are likely to stay strong, supported by global factors and positioning. Further ahead, budget and political risks loom which will likely lead to greater volatility. Moreover Latvia’s negotiations with the IMF are dragging on and may yet re-surface, in which case Hungary would be at risk. In sum, bullish Hungary positions ought to be tactical and after the sharp rally seen recently and some profit taking and/or risk reduction is very much warranted.

USD/CAD: How low can it go?

Market momentum increasingly favours a push to parity and CAD is getting support from across the board risk buying. Canadian officials have been very mixed in their comments on the CAD, with BoC Governor Carney expressing concerns last week when CAD was trading around 1.08. Cabinet ministers and the BoC statement are seemingly more receptive of CAD strength. In comments over the weekend, FM Flaherty remained optimistic on the gain in activity but was not reported as signaling any concerns on the currency. We find it hard to buy in to much greater gains in the CAD at this stage, given the weakness of some of the incoming Canadian indicators, but admit to surprise that there is not more official concern.