HiFX's Dan Bell says market sees 30%-40% chance of Aussie rate cut; FOMC minutes in focus and Easter eyes on non-farm payrolls

HiFX's Dan Bell says market sees 30%-40% chance of Aussie rate cut; FOMC minutes in focus and Easter eyes on non-farm payrolls

The latest interest rate decision from the Reserve Bank of Australia (RBA) looms large this week, with the minutes from the last US Federal Reserve interest rate setting meeting also set to be closely watched for hints on US monetary policy, and US jobs data due Friday night, NZ time, set to cap the week off with the latest look at the performance of the world's biggest economy.

HiFX senior dealer Dan Bell says most economists are picking the RBA to leave the Australian cash rate at 4.25%.

"But over the last couple of weeks there has been speculation from media commentators that perhaps the RBA could start talking about cutting interest rates, or even cut interest rates tomorrow afternoon," says Bell. "That has seen the market price in about a 30% to 40% chance of a rate cut tomorrow."

Overall the Australian economy is thought to be slowing. Bell notes Andrew Liveri, CEO of Dow Chemical, last week said he saw signs of a coming downturn in the Australian economy, arguing jobs growth and overall competitiveness were falling. And mining giant BHP Billiton has pointed to flattening Chinese demand for iron ore.

"So it's a bit of a mixed bag in Australia at the moment and the RBA tomorrow is going to be quite crucial in terms of where we see interest rates going there," Bell says.

The RBA's latest interest rate decision is due out at 4.30pm, New Zealand time, on Tuesday.

FOMC minutes in focus

Meanwhile, traders and investors will look closely at the Federal Open Market Committee (FOMC) minutes from its March 13 meeting when they're released on Wednesday. On March 13, the FOMC left official interest rates at 0% to 0.25%, where they've been since December 2008, and said an "exceptionally low level" of rates was likely at least until late 2014.

"US monetary policy continues to be a key driver of currency trends," says Bell. "Even if we get a hint of another round of quantitative easing, despite the fact the US economy is doing much better than it has done in recent times and the fact that US stock markets are also doing very, very well, the market will put the US dollar under pressure."

The speculation of a third round of quantitative easing, or money printing, in the US comes despite signs of improvement in the US economy with consumer and household confidence starting to improve and sharemarkets performing strongly.

"If you look at the performance of the US stock markets since the end of October last year, they're up over 25% on most of the key indexes there. The first quarters has been one of the best quarters in over a decade so there is some optimism in the US."

Bell also notes a recent rise in long term bond yields in the US, albeit off all times lows, which may have caught the Fed's eye.

"I think the Federal Reserve wants to try and jawbone the market as much as possible. And that might mean just being a little bit more downbeat in their statements, making sure that things don't pick up too much so that the cost of borrowing starts to go up and hamper the momentum in the US economy," says Bell.

'Benchmark high for more QE'

However he argues  the benchmark is quite high for another round of quantitative easing, although a lot of investors and traders will trade on any hint of quantitative easing.

"And Wall Street, who are selling stocks, they'd be quite happy to see another round of quantitative easing because it would add another boost of liquidity to the financial system and give more upside momentum to these equity markets."

At the end of the week, Friday night New Zealand time (Good Friday), the closely watched US non-farm payroll data - for March - is due out. Bell says the market is expecting about 230,000 new jobs ( the fourth consecutive month over 200,000) giving an unemployment rate of about 8.2% to 8.3%.

"We've seen continued strong jobs growth numbers out of the US over the last few months, with average jobs growth of around about 250,000 new jobs a month and in fact some of the economists are calling for the March numbers to come in close to 300,000. So we are seeing some momentum in the US economy, also consumer confidence and household confidence is starting to get a little better, retail sales are holding up quite well. All these things are leading some to see potentially a bit of a self reinforcing momentum to the US economy which we haven't seen in quite a while."

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Dan Bell is the Senior Dealer at HiFX, a UK-headquartered foreign exchange dealer with significant operations in Australia and New Zealand. It has a dealing room in Auckland. See more detail here.

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