Aussie Up After Rate Cut, Us Trade Gap Swells

Aussie Up After Rate Cut, Us Trade Gap Swells

The Australian dollar strengthened broadly on Tuesday despite the Reserve Bank of Australia cutting its interest rate. The RBA cut its benchmark rate by 25 basis points, taking it to a record low of 2.00%, following February's surprise cut to 2.25%.  



Aussie Up After Rate Cut, Us Trade Gap Swells
Aussie Up After Rate Cut, Us Trade Gap Swells

The latest move was not unexpected owing to comments made in the central bank’s previous statement that further easing might be appropriate in the period ahead.  Governor Glenn Stevens said on Monday in a statement that the Australian economy ‘is likely to be operating with a degree of spare capacity for some time yet’ and added that depreciation in the Australian dollar ‘seems both likely and necessary, particularly given the significant declines in key commodity prices.’

Theoretically we would normally expect a rate cut to devalue a currency, but the Aussie dollar advanced against most currencies in the aftermath of the announcement, possibly as the cut was already priced in and the market sees today’s action as being the full extent of the central bank’s easing cycle. AUD/USD rose 0.91% to 0.7907.

 The US dollar, meanwhile, weakened slightly against many of its major peers after a report from the Commerce Department showed the US trade deficit ballooned in March to its highest level since late 2008. The March trade balance showed a $51.4 billion deficit, substantially wider than had been expected, as imports bounced back. The trade balance is a component of GDP and in last week’s first estimate of first-quarter GDP growth of 0.2%, the trade gap for March was valued at $45.2 billion. The far wider trade gap reported today should trim GDP even further in the next revision, suggesting the US economy may even have contracted in the first quarter. GBP/USD rose 0.2% to 1.5150, while USD/CHF fell 0.23% to 0.9316.

The services PMI for April, meanwhile, showed a slight slowing, falling to 57.4 from March’s reading of 59.2. This was just below expectations and will do little to dispel concerns that the US economy is struggling at the moment, though the index suggests the services sector remains quite deeply in expansionary territory.

US stocks opened slightly lower on the back of the disappointing economic reports. Shortly after the open the Dow Jones was down 30 points or 0.16% at 18,040, while the S&P 500 Index slid 0.27% to 2108.8.

Canada also released an unexpectedly large trade deficit. The Canadian merchandise trade balance showed a record deficit of CAD 3.02 billion in March, the six successive month in which trade has remained in deficit. Furthermore, the trade account has been going deeper into the red in each of those month and February’s deficit was revised from an originally report $0.98 billion to $2.22 billion.

Exports have, not unexpectedly, been dragged down by weakness in the energy sector and, in fact, much of the bad news in the headline numbers are price-driven: by volume, exports were up in March and imports were down and improvements in the price of oil during April should help the numbers in the next report. The Loonie weakened against  most major currencies after the release of the merchandise trade numbers, but strengthened against the US dollar: the report revealed that Canada’s bilateral surplus with the  US strengthened in March from CAD 1.95 billion to 2.18 billion, thanks to a decline in imports from the US outstripping a fall in exports. USD/CAD was down 0.52% at 1.2032 by 10.00 am in New York.


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