Forex Trading

The Reserve Bank of Australia kept interest rates unchanged at 3%, as expected. Notably, RBA chief Glenn Stevens introduced new language into the statement accompanying the announcement, tempering a generally upbeat outlook by leaving the door open to cut rates again later this year.

Key Overnight Developments

• Prices for New Zealand’s Commodity Exports Rose for Second Month in April
• RBA Leaves Rates Unchanged at 3% But Leaves Room for Future Reductions

Critical Levels



The Euro traded lower overnight, correcting to test as low 1.3364 after a steep rally in New York hours. The British Pound followed a similar dynamic, reversing back to the 1.50 level after trying as high as 1.5052 early in the session.

Asia Session Highlights



The ANZ Commodity Price Index showed the cost of New Zealand’s top exports on global markets rose for the second consecutive month in April, adding 2.5% after a 1.0% in the previous month. Measured in the local currency, however, prices fell to the lowest level in nearly 2 years. This suggests the New Zealand’s Dollar’s recent gains may steer overseas buyers away from the smaller antipodean nation’s products, reversing some of the recent improvements in the Trade Balance.

The Reserve Bank of Australia left benchmark interest rates at 3.00%, as expected. RBA Governor Glenn Stevens said that noted “signs of stabilization” in the global growth, singling positive developments in the Chinese economy in particular, and added that financial markets are “on a path of gradual improvement.” Stevens expects inflation to continue to abate as the Australian economic performance likely to decline further over the rest of the year. That said, the central bank chief again asserted that “monetary policy has been eased significantly [and this] together with the substantial fiscal initiatives, will provide significant support to domestic demand over the period ahead.” Perhaps most significantly, Stevens included language absent from the previous announcement saying that the bank will monitor global and financial conditions in assessing the need for “further reductions”. Westpac Banking Corp’s chief economist Bill Evans has speculated that the decision to delay lowering rates now is likely tactical saying, “We expect the bank will see the need to have ample capacity to be cutting rates through the second half of 2009…The economic case for cutting rates is undeniable.” The Australian Dollar advanced 30 pips in the 20 minutes immediately following the announcement, reclaiming the 0.74 level.

Euro Session: What to Expect



The Euro Zone Producer Price Index is expected to have declined for the eighth consecutive month in March, showing wholesale inflation fell at an annual pace of -2.9%, the most in over 22 years. The release implies forthcoming downward pressure on consumer prices (the headline inflation gauge) as lower production costs are passed on via cheaper finished goods. Indeed, a survey of economists conducted by Bloomberg suggests CPI growth will come to a standstill by the end of June. Overnight index swaps suggest the market is pricing in an 88% probability that the European Central Bank will cut interest rates to a record-low 1% when policy is announced later this week.

In Switzerland, the SECO Consumer Climate indicator is expected to reverse lower in April to print at -25, down from -23 registered in January when sentiment rebounded as tumbling inflation boosted Swiss consumers’ purchasing power. The unemployment rate has risen to a 3-year high at 3.4% and is expected to surpass 4% by the end of the year, weighing on disposable incomes and suggesting consumer sentiment will continue to suffer in the months to come.

Written by Ilya Spivak, Currency Analyst
Article Source - Australia Holds Interest Rates Unchanged at 3% as Expected (Euro Open)