Tuesday, 5 Apr 2011

ECB Interest Rate Decision

The euro pared losses against most of its major currencies on Tuesday after talk of a hawkish U.S. think-tank report on European Central Bank monetary policy. The EUR is currently trading higher against the JPY by nearly 50 pips at 120.50. It is also trading higher against the CHF and USD.

The Australian dollar is off its all-time high for the second consecutive day. The declines come following the RBA holding interest rates steady coupled with a sharp drop in the trade balance. During the month of February the country was a net importer as the trade balance fell to a -0.21B deficit from a 1.43B surplus. Adding to the Aussie dollar's misfortune was this morning's Chinese interest rate hike. While monetary policy tightening was expected and largely priced into the market it remains a setback for Australia as China is Australia's largest trade partner and has a 23.1% share of Australian exports. A vast majority of these exports are mining products such as iron ore and coal. Traders may find viable entries long into the AUD/USD at the 1.0250 support level off of the February high.

Market participants are split as to the severity of the interest rate increases to come in the EU. In a speech yesterday, ECB President Jean-Claude did not expand on the intentions of the central bank. Traders will need to wait until Thursday to know if the expected 25 bp interest rate will be a one off adjustment or the beginning of a tightening cycle with multiple adjustments to the Minimum Bid Rate.