BoC rate cut = RBA to follow suit?

FXStreet (Bali) - Looks like Central Bank 'shockers' are becoming the norm in the FX arena, and after the unprecedented 'black swan' event orchestrated at the helm of the SNB last week, Wednesday was Bank of Canada's turn to catch the market wrong-footed.

The surprise 25 BP cut to 0.75% by the BoC, referred as an 'insurance' by BoC Governor Poloz, comes as terms of trade and inflation expectations keep falling, with the collapse in Oil prices main driving factor, which also worsens growth prospects due job cuts. Judging by the sharp decline in the Australian Dollar post BoC rate cut, one may conclude that speculative flows are re-entering the AUD sale bandwagon in anticipation of similar action taken by the RBA when they meet in February, as Iron oil, which has been in a free-fall, is to the RBA, what Oil is to the BoC. Market is now pricing in a 36% chance of a 25 BP RBA cut in Feb and 41 BPS worth of cuts over the year.

However, just as the market interpreted last week's SNB as communication of an aggressive full-blown QE coming on the dangerous assumption that Swiss CB may have been given an early tip-off, the fact that the BOC has taken action by cutting rates, does not necessarily mean greater chances of an RBA cut. If the market sees next Wednesday's Aus Q4 CPI significantly weaker, that's when more compelling evidence about a potential RBA cut will make more sense. One key distinction worth noting between Canada and Australia in recent month, somehow allowing the latter more time to manuevre, is the fact that the Australian economy has been creating solid jobs (most full time last month) as opposed to the pain int he labour market Canada is about to experience as depressed Oil prices force companies to cut back jobs.