Australia: Royal Bank of Australia puts interest rates on hold

The Australian dollar is breaking off the year's early highs and the medium term outlook for the currency could very much balance on interest rates. The Royal Bank of Australia (RBA) is keeping interest rates on hold at 5.5% and the question is whether or not this is the peak.

Many think the RBA is waiting for the results of consumer price data before deciding what action to take. However, any rate move this month or in June may be precluded by the political debate surrounding the budget. So unless there is significantly strong inflation data, rates will remain on hold for the time being.

Expectations are that the RBA will eventually tighten further. However, now that interest rates are on hold, the risk is that the next time they are raised it will be by a greater amount, as the momentum from the rise of last March will have been lost. When the markets realise this, the outcome will be very supportive for the Australian currency.

New Zealand: Reserve Bank may carry on raising interest rates

The New Zealand currency has receded from its record highs. However, the downward move has not been to the extent of that of last spring. Recently, New Zealand has experienced poor GDP growth and a widening balance of payments deficit on its current account.

Coupled with broad US dollar strength, this has resulted in the decline of the New Zealand currency. The governor of the Reserve Bank of New Zealand, Dr Alan Bollard, has not ruled out a further increase in interest rates, especially in view of the risk of inflation.

Switzerland: the downward spiral

The Swiss franc continued to weaken throughout the end of the first quarter of the year. In fact, economic and industrial data remain unsupportive for the economy. The leading business indicators remain in a downward spiral and the global impact of a squeeze on price margins (consumer prices less producer prices) reflect some of the reasoning behind the impact of emerging markets' trade flows and cheap imports.

However, the global shift in perception away from risk does not appear to be shedding any favourable light on the Swiss currency. Interest rate expectations have been subdued. Inflation data may only cause some volatility and are not expected to reverse the recent weak trend.

Sweden: downside risks

Interest rate expectations have pulled back after the last Riksbank policy meeting. Growth expectations were pared back and forecasts of a hefty 50 basis points cut in rates were suggested by an economic think tank.

With manufacturing confidence leaning the same way as consumer confidence - lower - a consumer slowdown in Sweden with the continuing stagnant employment situation remains a key risk.

Policy expectations are that the Riksbank will keep its present policy unchanged and wait for the European Central Bank (ECB) to make a move. Risks remain on the downside for the Swedish currency.

Norway: all's well that ends well

The recent news of unchanged policy, higher oil prices and an announcement to restart purchasing foreign currency can be interpreted in many ways. Historically, the oil receipt surpluses are recycled into the Petroleum Fund and have little immediate impact on the Norwegian krone.

While that is the case, the prospects for the Norwegian economy remain ahead of expectations and are expected to keep the Norwegian krone strong. The stronger economy may have an immediate upside impact on the forthcoming Consumer Price Index (CPI).

However, core inflation should remain contained. The thinking is that policy tightening will be at a measured pace. Estimate are for a hike of 25 basis points per quarter until Quarter 1, 2006. Continued credit growth and positive earnings expectations pose the greatest risk to this moderate interest rate forecast.

South America: externally influenced

Latin American currencies remain captive to external influences, the key one being US Treasury yields. Typically during the month following a very poor US payroll figure, Treasury yields lack direction.

Expectations are therefore for 10-year yields to consolidate around the 4.5% level, keeping emerging market currencies range-bound. The US Federal Reserve will continue to manage market expectations over looming inflation pressures, keeping the market guessing on a possible 50 basis points hike in interest rates.

For Treasury yields, price data are now arguably more important than jobs. Hawkish US price releases therefore provide the main threat to Latin American currencies, although a weak outlook for Japan and Europe mean very strong US Producers Price Index (PPI) and Consumer Price Inflation (CPI) data are required to really undo emerging market currencies.