Commodity currencies may face a race to the bottom as the Bank of Canada's surprise rate cut sent the Canadian dollar to five-year lows and could pressure Australia's central bank to follow suit.
"The reason [the Bank of Canada] cut rates is largely weaker oil prices. Australia is also a commodity exporter. The market could be excused for anticipating the RBA (Reserve Bank of Australia) would adopt a similar viewpoint," said Greg Gibbs, senior foreign-exchange strategist at RBS.
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Discussions among market participants of whether successive rounds of central bank easing are making for a "tacit currency war" are increasing, he said.
Race to the bottom
On Wednesday, the Bank of Canada (BOC) cut its benchmark rate to 0.75 percent from 1 percent, its first rate change since late 2010, and cut its inflation and growth forecasts, citing the more than 50 percent decline in oil prices since mid-2014. The Canadian dollar, also known as the loonie, tanked, shedding as much as 4 percent against the dollar compared with Tuesday's levels. The U.S. dollar was fetching around 1.2354 Canadian dollars in Asian trade Thursday, off Wednesday's high of 1.2394 Canadian dollars, levels not seen since 2009, during the Global Financial Crisis.
Other central banks have also moved to weaken their currencies, with the Bank of Japan's quantitative easing partly aiming for a weaker yen and Australia's central bank trying to talk down its dollar. The European Central Bank's (ECB) likely move to announce plans Thursday to start buying assets set to further dent the euro, already at its weakest against the U.S. dollar since 2003.
"Every central bank is trying to get rates down to zero, if not lower than zero," Kumar Palghat, managing director at bond manager Kapstream Capital, told CNBC. "The only question is, you take rates down to zero, you depreciate your currency, you buy as much bonds as you want, if it doesn't work, then what else are they going to do?"
The resources factor
Energy and commodity exporters have particularly felt the heat.
"Oil extraction now comprises roughly 3 percent of Canadian gross domestic product (GDP) and crude oil about 14 percent of Canadian exports," Wells Fargo Securities said in a note Wednesday.
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But while it estimated that energy jobs were only around 2 percent of the country's overall employment, the Canadian stock market and the consumer wealth effect may take a larger hit, it said. Energy makes up just over 20 percent of Canada's S&P/TSX index, compared with only around 10 percent of the U.S.'s S&P 500 index, Wells Fargo said.
But the BOC may have its eye on a weaker loonie's ability to support the country's non-oil exporters, especially with 8 percent of Canada's exports headed to the U.S., it said.
The RBA may take a similar tack at its meeting next month, analysts say.
"The BOC decision has relevant parallels to Australia — namely, a commodity-centric economy with growth slightly below-trend and an inflation pulse that is providing space for some additional easing," Daniel Been, senior foreign-exchange strategist at ANZ, said in a note Thursday.
