The Reserve Bank of Australia Interest Rate Decision

The market is expecting to see the reserve Bank of Australia reduce overnight lending to 7.00% on Tuesday, a cut of 25 basis points in a move that looks as though has already been priced into Aud/Usd valuations. The 'sell' part of the 'sell the rumor, buy the news' story may have already been put in place. A new 7% rate, if that is what happens at 00:30 EDT on Tuesday, will still hold Australian 10 year government bond yields considerably higher than those issued in the U.S., 5.5% compared to 3.8%, and may be an aussie positive, even in the re-valuing of lower overnight rates. With gold holding above $800 an ounce it may be hard for the market to sell things too much lower unless it is intimated that more cuts are still to come, or that the the head of the Reserve Bank of Australia, Mr Glen Stevens, states that the Australian economy is really suffering with no growth potential as a result of this year's rate increases.

If the RBA hold rates at the current 7.25% levels, and chooses not to reduce overnight lending rates in the fear that a cut may stoke inflationary pressures, the aussie will very quickly appreciate against all currency cross pairs, including the dollar says Jason Pilling, currency analyst at TheLFB-Forex.com. That however is the remotest of outside chances it seems, "The likely view is that the RBA reverse the recent rate increase, and let the economy absorb the cut, because although the consumer is burdened by high rates, the business outlook in Australia is still strong." He added, "Cutting rates too far may create a boom and bust scenario, and the RBA are not known for allowing that to happen".

The ECB Mandate No Inflation

The ECB. The European Central Bank reveals their rate decision on Thursday, and few expect the ECB to do anything other than hold rates at 4.25%. The ECB has one mandate, and that is to fight inflation, and fight it at all costs, literally. The euro valuations have dropped in-line with the Usd buying, and have been able to maintain the lower valuations because of the negative reports that have been released from manufacturing, retail and consumer related sectors over the course of the last quarter. That all now looks to have been built in to euro values, and it also looks as though it will be hard for the market to get the euro much lower ahead of the meeting. The levels of growth, and the levels of inflation, are much the same as the U.S. growth and inflation numbers.

The main difference is in the debt levels that each region carries, and that the Euro-zone has a mixture of service, manufacture and agriculture, whilst the U.S. has become much more serviced based in its infrastructure. That affords the ECB the ability to off-set growth in one area with contraction in another, without having to worry about sustaining interest payments on a mountain of debt. As such anything other than a cut in rates by the ECB is unlikely to lead to much more sustainable depreciation in euro values.

Looking ahead it seems that sentiment and market momentum has played a huge part in recent currency trade in allowing the dollar to break and then hold new values. It understood that the dollar surge in July/August was central bank driven, but the question this week to be answered is now that the markets are back in full swing, can the dollar bulls hang on to recent appreciation? With another week of major news releases we are sure to have our answer.

The BOC and BOE Rate Decisions

The Bank of Canada is expected to hold their interest rates steady on Tuesday, and that would be in-line with what many expect the Federal Reserve to do as well. The Canadian dollar will therefore be bought or sold on what the market sees as potential forward growth numbers, and with a global slow-down expected by the International Monetary Fund it may be that Canada's exporters will be happier with a lower value C$. Either way, the cad pair may not be able to move too far from the channel on the daily chart because of the U.S./Canadian links. The Bank of England's MPC meet on Thursday, with analysts still not pricing in a cut from the Bank. The economic outlook from the U.K. has been stated as the reason that the Gbp has been sold lower over the past quarter, but if that is the case the question really needs to be asked in what the market would do to pound valuations if the Bank do actually cut. This is a currency that has a huge drop below it if the MPC members were to look to reduce lending below the current 5.0% level. The markets have priced in the bad news from the U.K., but it seems as though a rate cut has not yet been built into current valuations. This is by far the weakest looking pair among the majors, and whatever happens on Thursday it seems that there is not much to see outside of more pound negativity.