Forex Trading

The Australian Dollar surged 0.8% against its US counterpart late into the overnight session despite a surprise 0.25% reduction in benchmark borrowing costs as the Reserve Bank of Australia hinted an end to further interest rate cuts for the time being. The Euro and the British Pound extended losses against the greenback as Asian stock markets followed Wall St lower.

Key Overnight Developments

• Bank of Japan Keeps Rates at 0.10%, Expands Loan Access Programs
• Australian Dollar Rallies as Central Bank Signals End to Interest Rate Cuts

Critical Levels



The Euro extended losses in overnight trading, slipping as much as -0.7% against the US Dollar. The British Pound followed suit, shedding -0.9% to the greenback as Asian stock markets slipped lower on renewed concerns about the state of the global economy. The US Dollar has been trading inversely with stock prices in recent months, reflecting a perception of the currency as a safe-haven asset amid global economic and financial turmoil.

Asia Session Highlights



As expected, the Bank of Japan kept interest unchanged at 0.10%. Rather, policymakers said they will bolster current liquidity-boosting measures by expanding the range of assets acceptable as collateral for loans. As for the bank’s assessment of current economic conditions, traders were given a familiar mantra with the BOJ saying that the economy has deteriorated “significantly” and will continue to do so “for the time being”. Although the BOJ still expects the economy will begin to recover late into the 2009 fiscal year (Winter-Spring, 2010), the level of uncertainty about the forecast remains “high”. Further, members of the monetary policy body expressed concern about “downside risk of inflationary expectations”, alluding to the possibility of deflation. This could prove disastrous for the world’s second-largest economy as consumers and businesses perpetually put off spending and investment to wait for the best possible bargain, sinking the economy still deeper into recession.

The Reserve Bank of Australia surprised the markets, cutting benchmark interest rates 25 basis points to bring borrowing costs to 3.00%. Importantly, RBA Governor Glenn Stevens reiterated that the Australian economy is contracting less severely than that of its main trading partners and expressed confidence that while growth will likely continue to decline over the rest of the year, the “major change” in both monetary and fiscal policy will “provide significant support to domestic demand over the period ahead.” Most notably, Stevens conspicuously did not include any reference to revisiting the possibility of additional cuts in upcoming policy meetings, suggesting the central bank has reached the end of its easing cycle. The Australian Dollar initially stumbled as the announcement crossed the wires but quick rebounded to add 0.8% against its US counterpart as traders priced in the reduction in rate cut expectations.

Euro Session: What to Expect



UK Industrial Production is expected to have dropped -12.5% in the year to February, the largest decline since records began in 1976. The industrial sector employs over 18% of Britain’s labor force and produces the bulk of the country’s exports, making it both essential to a lasting recovery in economic growth and highly sensitive to the current slump in global demand. The outlook is likely to remain grim in the months ahead as the largest global recession since the Second World War continues to weigh on overseas sales, keeping the lid on economic growth. Indeed, GDP is seen shrinking -3.3% through 2009, the deepest contraction among the G7 nations according to forecasts from the International Monetary Fund. For their part, the Bank of England is expected to keep benchmark interest rates on hold at 0.50% but will almost certainly announce further quantitative easing measures to check the slide in output.

Moving to the continent, the final revision of the Euro Zone’s Gross Domestic Product is set to confirm that the currency bloc’s economy shed -1.5% through the fourth quarter of last year. Yesterday, February’s Producer Prices fell more than economists expected, showing wholesale inflation was shrinking at an annual pace of -1.8%, the most in a decade. Despite tumbling prices and deepening recession, the European Central Bank cut interest rates less than economists expected last week. In the press conference following the initial announcement, bank president Jean-Claude Trichet said rates had not reached “the lowest limit” and revealed that “the Governing Council intends to decide on further non-standard measures at our next monetary policy meeting”.

Written by Ilya Spivak, Currency Analyst
Article Source - Australian Dollar Rallies as Central Bank Signals End to Interest Rate Cuts (Euro Open)