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Australian Dollar Lower as RBA Surprises, Cuts Rates 0.75% (Euro Open)

Tuesday, 04 November 2008 04:05:08 GMT  |  Ilya Spivak, Currency Analyst

The Australian Dollar slid against its US counterpart, testing as low as 0.66 as the Reserve Bank of Australia surprised forex markets by cutting benchmark borrowing costs by a greater-than-expected 75 basis points to bring rates to 5.25%. Looking ahead, soft European inflation data promises to support an ECB rate cut lining up this Thursday.

Key Overnight Developments

• NZ Commodity Prices Fall Most in Over 20 Years
• RBA Surprises, Cuts Interest Rates 0.75%


Critical Levels



Bearish Euro momentum carried into overnight trading from New York hours, sending the single currency below the 1.26 mark. The British Pound followed along, tumbling to test the confluence of psychological and pivot-point support at the 1.56 level.


Asia Session Highlights



The ANZ Commodity Price index revealed a massive -7.4% drop in the prices for New Zealand’s key export goods, the largest decline in at least 22 years. Dairy prices, which make up a fifth of all exports, fell 9.9%. Prices for primary goods have been under pressure on expectations that the global economic slowdown will derail demand, particularly from up-and-coming markets in India and China. Indeed, the CEO of mining giant Rio Tinto said yesterday that “the slowdown in Chinese economic growth is quickening and demand…won’t rebound until 2009.” This does not bode well for New Zealand, which is now officially in recession having seen negative GDP growth in the first and second quarters of this year. The Reserve Bank of New Zealand is expected to remain aggressive in offering monetary stimulus for the troubled antipodean nation, with overnight index swaps pricing in at least 100 basis points in rate cuts over the next 12 months.

The Reserve Bank of Australia surprised the forex markets, cutting benchmark borrowing costs by a greater-than-expected 75 basis points to bring rates to 5.25%. RBA Governor Glenn Stevens sounded ominous in the statement accompanying the decision, saying that "it appears likely that spending and activity will be weaker than earlier expected." Stevens again reiterated that although consumer price inflation remained high in September, the RBA policy board continues to believe that inflation will moderate over time as slowing global and domestic demand takes its toll. The Australian dollar slid against its US counterpart following the announcement, testing as low as 0.66. That said, it is important to note that traders had been pricing in 170bps in rate cuts over 12 months ahead of the previous decision where the RBA surprised and cut rates by a whopping 100 basis points. Together with today's announcement, 175bps in easing have been issued in just 2 months, likely raising speculation about how much further the easing campaign will continue in the near term.


Euro Session: What to Expect



Switzerland’s Consumer Price Index is expected to show the pace of price growth slow to an annualized 2.5% in October, the lowest in six months. As with most inflation readings across the G10, Swiss CPI peaked in July as oil prices reached above $147/barrel and began easing when the crude rally faltered and changed direction. Still, trading in overnight index swaps suggests the markets are betting on inaction from the Swiss National Bank at the next policy meeting on November 12th.

The Euro Zone Producer Price Index is expected to see wholesale prices down -0.1% in September to bring annualized growth to 8.0%. Easing inflationary pressure will give the European Central Bank more room for monetary easing as the 15-nation currency bloc barrels towards full-blown recession. Jean-Claude Trichet and company are expected to slash rates by 0.50% on Thursday this week.


Related Articles:

Australian Dollar Forecast - Why the Emergency OPEC Meeting Could Help Boost AUD/USD
Forex Technical and Fundamental Forecasts for October



To contact Ilya regarding this or other articles he has authored, please email him at ispivak@dailyfx.com.

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