The Loonie Is In Reserve As Central Banks Hold Their Tongue

 | May 15, 2014 05:42AM ET

  • Aussie and Kiwi remain bid after budget and review

  • UK hikes rate timing remains uncertain as BoE takes wiggle room

  • The loonie in Reserve

    • FX markets have been inundated with budgets reviews, financial stability reports and a quarterly inflation report from various countries this week, none of which provided a clear cut direction for the local currency. FX traders were looking for more definitive input and clarity from the bentral banks but as usual received obfuscation wrapped up as insight.

    Aussie budget as expected

    The Australian budget release, trumpeted to great fanfare locally, proved less negative to AUDUSD than previously thought. The so called "slash and burn" budget raised concerns that raising taxes and cutting spending would hamper economic growth and undermine the currency. The currency concerns proved unfounded as most of the measures had already been leaked and were reflected in the exchange rate. AUDUSD actually gained.

    RBNZ Stability report blows hot and cold

    The Reserve Bank of New Zealand (RBNZ) Financial Stability Report was a study in contradictions. The RBNZ governor opened with an upbeat statement that painted a picture of a rosy economic outlook. He then proceeded to outline several risks to the view including, high household debt, overvalued housing prices, elevated dairy sector debt and concerns about the Chinese economy. Despite the stated risks, NZDUSD edged higher as the risks weren't unknown and kiwi interest rates are still going higher.

    UK rates are rising - at some point in time

    The highly anticipated Bank of England (BoE) Quarterly Inflation Report was viewed by some as slightly dovish as the vague and difficult to quantify, "spare capacity" was cited to provide the BoE wiggle room around the timing of a pending interest rate increase. Mark. Carney appears to have stuck to his previous forecast for rates rising in the second quarter of 2015 which knocked GBPUSD for a loop as many traders were looking for rate hikes to have been moved forward.

    The loonie is in reserve

    The Bank of Canada spring review added another "Canada positive" to the Canadian dollar outlook noting that the world's central banks and monetary authorities are adding Canadian dollar assets to their official foreign reserve portfolios. Canadian dollar reserves, while still minuscule, have been rising since the onset of the financial crisis in 2008, a direct result of having a stable and solvent banking system.

    Chart: Canadian dollars in official reserves