FX Daily: AUD and CAD are defensive ahead of their central bank meetings

No rate moves by RBA today and BOC tomorrow.
Group Research, Philip Wee05 Sep 2023
    Photo credit: Unsplash/Adobe Stock Photo

    No one expects Reserve Bank of Australia Governor Philip Lowe to raise rates at his last policy meeting today. The cash rate target will stay unchanged for a third month at an 11-year high of 4.10%. CPI inflation fell a fourth month to 4.9% YoY in July, significantly lower from its 8.4% peak in December. In July, the unemployment rate rose to a four-month high of 3.7% while employment declined by 14.6k, its worst since October 2021. On 6 September, expect real GDP growth to fall below 2% for the first time since 4Q20. Deputy Governor Michele Bullock will assume the reins at the central bank on 18 September, a day after Lowe’s term ends. Consensus and interest rate futures see a low probability for a final hike in 4Q23 and rate cuts starting around mid-2024.

    After failing to break above 0.69 for the second time on 14 July, AUD/USD tumbled to 0.6365 on 17 August on a resurgent USD on the Fed pushing for “higher for longer” rates, China’s confidence crisis over its economy and property sector, risk aversion in global equities, and the RBA’s decision to hold rates vs hike consensus at its August meeting. Since then, AUD has been consolidating in a 0.64-0.65, alongside USD/CNY’s 7.25-7.30 range and a recovery in risk appetite. However, the USD Index (DXY) is still up for the year, holding above 104 into the crucial FOMC meeting on 20 September.

    Tomorrow, we expect the Bank of Canada to leave the overnight lending rate unchanged at a 22-year high of 5% after two back-to-back hikes in June and July. Although CPI inflation rose again to 3.3% YoY in July from 2.8% in June, the unemployment rate rose a third month to 5.5% in July, its highest since January 2022. Real GDP disappointed by contracting 0.2% QoQ sa in 2Q23 and revising 1Q23 growth to 2.6% from 3.1%. Household consumption expenditure growth slowed to 0.2% from 4.7%, its worst since 2Q21. Investment in residential structures contracted a fifth quarter by 8.2% from higher borrowing costs and lower demand for mortgage funds. Interest rate futures and Bloomberg consensus see the BOC keeping rates unchanged into 1Q24 before cutting them from 2Q24.

    Between 14 July and 25 August, USD/CAD rebounded from a 10-month low of 1.31 to 1.3640, the highs in late May. Since then, USD/CAD consolidated mainly inside a 1.35-1.36 range. However, USD/CAD is underpinned by the resilient US economy against the Canadian economy having one foot into a technical recession. Sentiment for the CAD will sour if Thursday’s net employment declines a second month in August.

    Quote of the day
    “Opportunity is missed by most people because it is dressed in overalls and looks like work.”
         Thomas Edison

    5 September in history
    The First Opium War started in China in 1839.


    Philip Wee

    Senior FX Strategist - G3 & Asia


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