Central bank meetings in Australia and Canada will shift attention to the aussie and the loonie this week in a relatively important month for monetary policy decisions. The commodity currencies aim to steal ground from the US dollar, while gold is hoping for a bullish breakout too ahead of the ISM non-manufacturing PMI index.    

RBA rate decision --> AUD/USD

The Reserve Bank of Australia meets on Tuesday, with the policy statement expected to move markets at 04:30 GMT.

The central bank held interest rates steady at 4.1% in July and August and analysts are virtually certain that no change will take place this time either. Headline inflation showed a significant deceleration to 4.9% y/y in July versus June’s print of 5.5%, eliminating speculation for a 25bps rate hike.

A prolonged pause usually precedes rate cuts. Therefore, investors will carefully look for any signs of monetary tightening having peaked. Yet, it would be premature to announce the end of the tightening cycle when core inflation stands well above the RBA’s 2-3% target. The RBA could instead follow the Fed’s steps and switch to a data-dependent approach in order to avoid any panic in markets. The absence of persisting wage pressures and external economic threats from a weakening Chinese economy could help the central bank stay on the sidelines for now.

As regards the aussie, it will need a close above the nearby resistance of 0.6480 against the US dollar to gain fresh positive momentum, though a bullish short-term outlook could be a tough job for the bulls.

Australian GDP and retail sales, as well as China’s CPI and trade figures, could be important to watch throughout the week as well.

BoC rate decision --> USD/CAD

The Bank of Canada (BoC) will be the next major central bank to meet this week. Having delivered two 25bps rate hikes to 5.0% during the summer, it may again move back to the sidelines this month according to futures markets.

Despite the latest resurgence in headline inflation, the central bank is closer to its range target of 1-3% compared to its major peers. That could provide some comfort to policymakers and allow some time for monitoring after disappointing Q2 GDP growth figures.

That said, investors are currently seeing another rate hike happening by the end of the year with a small probability of around 20%, while they are also pricing in a rate cut in a year from now. There is uncertainty over whether inflation will sustainably ease towards the BoC’s price target too. Hence, if the central bank backs another rate increase, the buttered loonie could recoup some lost ground, though for a meaningful rally, policymakers will need to play down rate cut expectations too. In this case, it would be interesting to see if the 1.3460-1.3530 support zone will hold firm.

Dollar volatility --> Gold

Gold completed two green weeks, rising strangely along with US stock indices as Treasury yields finished August’s session with milder gains. September might be an interesting month in markets as investors eye the end of the rate hike cycle in the US and in other major economies. A combination of growth risks and any signals central banks may reverse course next year could bode well for the precious metal, which seeks new buying interest above the 1,940-resistance area.

The ISM non-manufacturing PMI index could be a source of volatility on Wednesday in a relatively quiet week of data releases in the US and Europe. Forecasts point to a softer reading.