Australia's surprise interest rate hike, the first among the Group of 20 countries, set off a wave of optimism that rippled through currency and stock markets Tuesday.
The Canadian dollar CAD/USD-I surged by more than 1 cent to a one-year high of 94.62 cents (U.S.) Tuesday, lifted along with other currencies after the Reserve Bank of Australia raised its benchmark interest rate by 25 basis points to 3.25 per cent. The Australian dollar hit a 14-month high of 88.53 cents after Australia's central bank became the first to increase borrowing costs since the start of the global financial crisis.
The Toronto Stock Exchange TSX-I gained more than 209 points to 11,311.8 in the first half hour of trading, though it later settled back, buoyed by strong commodity prices, better-than-expected purchasing managers' data out of Europe and the United States and growing investor confidence that a global economic recovery is in sight.
Australia's rate increase was viewed as a positive sign by equity markets, “a sign that the global economy is starting to turn around,” said Colin Cieszynski, market analyst with CMC Markets Canada. “When times are good, rates go up. When times are bad, rates go down.”
Sacha Tihanyi, a currency strategist with Scotia Capital Inc., said all the major currencies, apart from the British pound, were gaining against the U.S. dollar.
“The RBA raised rates overnight, so that's put a strong bid tone under the major currencies, and the equity markets are doing quite well,” Mr. Tihanyi said.
“It's a supportive environment for currencies. Oil has also rebounded back over $70, up to $71.”
Mr. Tihanyi said the loonie “has been rip-roaring the last three sessions.”
The U.S. dollar sank after the rate hike but also because of rumours that Gulf States were in talks with other countries to replace the U.S. dollar with a basket of currencies in oil trading. This was quickly denied, allowing the greenback to recoup some of its losses.
The optimism sparked by Australia's move sent stocks rising around the world, building on Monday's gains. By early afternoon, the Dow Jones industrial average DJIA-I was up 128.4 points to 9,728.2, the Standard & Poor's 500 index SPX-I was up 14.55 points to 1,055, and the Nasdaq Composite index COMP-I was up 23.64 points to 2,091.
Mr. Tihanyi said Australia's rate move “may now lead to increasing speculation on which major central bank will be next to raise rates, particularly given the recent emphasis being put on co-ordination of exit strategies by various non-governmental international institutions and organizations…
“However, one should not entirely jump the gun on the expectation that all major central banks will be following the RBA in short order as Australia presents something of a special case,” Mr. Tihanyi said in a note to clients.
Unlike the other major industrialized countries, “Australia never actually had a technical recession. They had one quarter of negative growth, and that was two or three quarters ago,” he said in an interview.
“They are kind of piggy-backing off the China growth story,” he added.
“Not many other major central banks, or economies, can claim such a supportive state of affairs, and countries like the U.K. and U.S. are not likely to be rapid movers on monetary policy either as they have also suffered the worst from banking sector crises, which adds another unpleasant dimension to their economic recovery,” Mr. Tihanyi said.
With files from The Associated Press and Reuters
