RBA sees inflation moderating but is not ready to cut the base rate

The Reserve Bank of Australia did exactly as the markets had predicted and left their base rate at 4.35% when they met in the early hours of this morning (UK time). The accompanying statement does confirm that they are happier now that inflation appears to be moderating but, at 3.4%, annual CPI is still well above their 2% target. Hence they are unwilling to reduce the cost of borrowing at this stage. The Australian dollar lost almost one cent OK it’s the pound in the wake of that announcement. GBP/AUD is up to just shy of AUD 1.95 right now. There is no major news or data from the UK or Australia for the rest of the day, so this exchange rate is likely to remain elevated but we may see some profit taking on the overnight moves when the US markets kick in. Australian dollar buyers are likely to be active this morning to avoid the risk of lower rates later.

Yen weaker as BOJ hikes to 0.0% interest rate

The Japanese base rate has been fixed at minus 0.1% since 2016 but the Bank of Japan raised it by a minuscule 0.1% this morning to bring the base rate to zero percent. The move from negative interest rates is largely a symbolic gesture but it was accompanied by a cessation of the purchase of a number of bonds and exchange-traded funds; both measures designed to balance out long-term yields on bonds. They also made it very clear this was not the start of a series of rate hikes. So, the markets reacted by selling the Yen. The GBP/JPY rate shot up to JPY 191.20 briefly, before dropping back to JPY 190.80.

CAD steady but inflation uptick expected

We will see the publication of Canadian consumer price inflation later today and the markets are expecting an uplift in the headline rate to an annualised 3.1%. At a time when central banks are hoping to start cutting interest rates, a step up in inflation is exactly what the Bank of Canada doesn’t need. The GBP/CAD rate is lower this morning ahead of that news. GBP/CAD is down to CAD 1.7225, a level at which the pound has found buyers throughout the last 10 days. If the inflation figure is below 3.1%, we are likely to see this rate bounce higher but there is really only one cent of upside before we find Canadian dollar buyers just as we did on the 10th of March. If inflation comes in above 3.1%, any chance of a Bank of Canada rate cut diminishes or is at least delayed. That could see this pair back to the trend line which just provided support since September 2023. Traders will consider anything below CAD 1.71 as an attractive GBP buying level.