Australia's central bank is now more likely to cut interest rates

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Dollar tipped to slide under US80¢

The Australian dollar could be spending its last days above US80¢ after the Bank of Canada's surprise rate cut – its first in almost six years – sharply increased the chances of the Reserve Bank of Australia following suit.
The local currency slipped 1.1 per cent overnight on Wednesday and was trading at US80.60¢ in late trade on Thursday. At the same time, the Aussie slumped 1.6 per cent against the euro and was fetching 69.44 euro cents in afternoon trade.
Saying that the collapse in oil prices will slow inflation and weigh on the domestic economy, BoC governor Stephen Poloz said the bank "has room to manoeuvre should its forecast prove to be either too pessimistic or too optimistic". The rate cut decision dragged the Canadian dollar down as much as 2.3 per cent to a six-year low of C80.7¢ against the greenback.
Chances of an Australian rate cut jumped after the BoC's surprise move. Markets are now pricing in a 36 per cent chance of a rate cut at the next RBA meeting, up from 19 per cent on Wednesday, and a 50 per cent chance of a cut in the official cash rate over the next 12 months, up from 41 per cent on Wednesday.
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A loosening of monetary policy is likely to apply downward pressure on the local currency. The Australian dollar is spending its final days above US80¢, ANZ senior currency strategist Daniel Been said.
"The BoC decision has relevant parallels to Australia – namely, a commodity-centric economy with growth slightly below-trend and an inflation pulse that is providing space for some additional easing," Mr Been said.
"While the Canadian economy has far more leverage to the negative impact of the decline in oil prices, when considering the peak to trough move in key commodity prices since 2010, the fall in oil is actually matched by the decline seen in iron ore."
Business confidence and inflation numbers due out next week may force the RBA to act sooner rather than later, implying the dollar has more room to fall.
Against a basket of currencies of Australia's major trading partners, the dollar is at 66.9 on a trade-weighted basis. On this basis, the Aussie is down 7.7 per cent since September, compared with a fall of 13.7 per cent against the US dollar. This means that a large portion of the Australian currency's weakness is relative to the strength of the recovering US dollar.
The BoC's decision doesn't place pressure on the RBA to cut rates. Rather, the second surprise move from a central bank in the last two weeks – last week the Swiss National Bank scrapped its peg to the euro – is forcing markets to re-think the possibility of a rate cut in February, Deutsche Bank chief economist Adam Boyton said.
"Does the RBA look at what the Canada has done and think 'we should take that into account'? No, they don't," Mr Boyton said.
"But, I think what it does do to the market is say 'well maybe you shouldn't be quite so complacent going into February's RBA board meeting, that there's been a number of central bank surprises around the globe this year, the market is pricing RBA easing at some point, and we need to be open to the possibility that it could be as early as February'."
The market seems more or less fully priced for the RBA to cut rates this year, Mr Boyton said, and there is actually a risk that the Australian dollar rebounds slightly to around US82.5¢ in the near-term. However, it is unlikely to push towards US85¢ if the price of iron ore remains weak.


Read more: http://www.smh.com.au/business/marke...#ixzz3Pb3cI8PD


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