Forex Today: RBA and PBoC cut policy rate, eyes on Canada inflation data
Here is what you need to know on Tuesday, May 20:
The Reserve Bank of Australia (RBA) and the People's Bank of China (PBoC) announced rate cuts early Tuesday, as anticipated. Meanwhile, the US Dollar (USD) struggles to stay resilient against its rivals as markets remain risk-averse. Statistics Canada will publish Consumer Price Index (CPI) data for April later in the day. Additionally, investors will continue to scrutinize comments from central bank officials.
US Dollar PRICE This week
The table below shows the percentage change of US Dollar (USD) against listed major currencies this week. US Dollar was the weakest against the Euro.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | -0.85% | -0.64% | -0.56% | -0.18% | -0.21% | -0.63% | -0.40% | |
| EUR | 0.85% | -0.04% | 0.11% | 0.51% | 0.54% | 0.05% | 0.23% | |
| GBP | 0.64% | 0.04% | -0.15% | 0.55% | 0.58% | 0.09% | 0.27% | |
| JPY | 0.56% | -0.11% | 0.15% | 0.40% | 0.54% | 0.15% | 0.23% | |
| CAD | 0.18% | -0.51% | -0.55% | -0.40% | -0.01% | -0.45% | -0.28% | |
| AUD | 0.21% | -0.54% | -0.58% | -0.54% | 0.01% | -0.48% | -0.30% | |
| NZD | 0.63% | -0.05% | -0.09% | -0.15% | 0.45% | 0.48% | 0.17% | |
| CHF | 0.40% | -0.23% | -0.27% | -0.23% | 0.28% | 0.30% | -0.17% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).
The PBoC cut its Loan Prime Rates (LPRs) on Tuesday. The one-year LPR was cut from 3.1% to 3.00%, while the five-year LPR was cut from 3.60% to 3.50%. In the meantime, China accused the United States (US) of undermining the two countries’ preliminary trade agreement late Monday after the US issued an industry warning against using Chinese chips that singled out Huawei. US stock index futures were last seen losing between 0.3% and 0.5%, while the USD Index was down 0.15% at around 100.20.
The RBA lowered the Official Cash Rate (OCR) by 25 basis points (bps) to 3.85% from 4.1% following the conclusion of its May monetary policy meeting. In the policy statement, the RBA noted that the escalation of the global trade conflict was a key downside risk to the economy. While commenting on the policy outlook, RBA Governor Michele Bullock noted that more adjustments to the policy were possible and added that they have discussed whether to opt for a 25 or a 50 bps cut. After rising more than 0.8% on Monday, AUD/USD stays on the back foot early Tuesday and was last seen losing 0.5% on the day at around 0.6420.
USD/CAD trades in a tight channel near 1.3950 in the European morning on Tuesday. Annual inflation Canada, as measured by the change in the CPI, is forecast to decline to 1.6% in April from 2.3% in March.
EUR/USD stays in a consolidation phase near 1.1250 after rising about 0.7% on Monday. The European Commission will publish preliminary Consumer Confidence Index data for May later in the day.
USD/JPY registered losses for the fifth consecutive trading day on Monday. The pair continues to edge lower and trades slightly below 144.50. Japan’s Finance Minister Shunichi Kato said on Tuesday that he expects any talks with US Treasury Secretary Scott Bessent this week to be based on foreign exchange.
Gold ended the day marginally higher on Monday. XAU/USD struggles to preserve its bullish momentum and retreats toward $3,200 early Tuesday.
GBP/USD holds its ground and trades above 1.3350 after rising 0.6% on Monday. The UK's Office for National Statistics will publish April CPI data early Wednesday.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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