BOC Move Increases Chance of RBA Action

Replace warm beaches with beautiful mountains, bouncy kangaroos with bulky moose, footy with hockey, and flat white coffee with a double double, and you’ve pretty much accounted for the discrepancies between Australia and Canada.  Both former British colonies feature plenty of land mass, similar incomes, and a fondness for exporting buried resources. In the Economist’s list of the world’s Best Cities, they take up seven of the top 10 slots. Both of their colourful currencies even feature the Queen.

So it shouldn’t be surprising that when the Bank of Canada surprised markets with a rate cut yesterday, the Aussie dollar dropped more than 1 per cent. The reasoning is simple: if Canada needs to stimulate its slowing economy because of falling commodity prices, Australia might have to do the same.  “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,” said Daniel Been, economist at ANZ.

He notes that oil makes up 22 per cent of Canada’s export basket, while in Australia, iron ore and coal make up 34 per cent of exports. Oil prices have tumbled 55 per cent in the last year; iron ore has dropped 46 per cent.  In December, the chorus of voices calling for a rate cut from the the Reserve Bank of Australia was growing. But the argument was quashed, first by Governor Glenn Stevens – who said cheap money simply wasn’t a problem – and then by strong December employment report – which showed the creation of 41,600 full-time jobs.

Financial Times

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