For Australia's Next Move on Rates, Keep Eye on Canada, RBC Says

Plunging commodities as China slowed prompted Canada to unexpectedly cut interest rates in January and Australia followed suit. Is history about to repeat itself?

RBC Capital Markets’ Su-Lin Ong reckons the similarities between then and now are growing as her Canadian colleagues switched to forecast a cut at the next Ottawa meeting July 15.

Slumping oil that accounts for 25 percent of Canada’s exports and sliding iron ore and coal that make up half of Australia’s could be laying the ground for more rate reductions. Traders are boosting bets on an easing in both countries.

“We pay particular attention to Bank of Canada action given the commodity synergies of both countries,” said Ong, head of Australian economic and fixed-income strategy. “We have been highlighting an increasing number of parallels to January.”

The Reserve Bank of Australia is “unlikely to be content” with the current level of the local currency with iron ore in a bear market, she said. Add to that China’s stocks turmoil and traders are pricing in a 40 percent chance of an RBA rate cut in September, up from 30 percent a week earlier. The odds climb to 63 percent by year’s end.

While acknowledging the hurdle is high for Australia to ease from a record-low 2 percent, Ong sees reductions late this year and in mid 2016, bringing the cash rate to 1.5 percent.

“Developments in China and Greece underscore some of our key drivers around the weaker terms of trade and incomes and support further easing,” she said. “The Bank of Canada developments are notable in that regard, support our base case scenario, and increase the risk of another cut occurring sooner.”