Australian Dollar Drops on Unexpectedly Large RBA Rate Cut
THE TAKEAWAY: Reserve Bank of Australia Unexpectedly Cut Cash Rate to 3.75%, Policy Statement Dovish > Fears of Global Growth Slowdown Return, Leading Traders to Adjust Portfolios > AUDUSD Drops on Catch Up in Sell Off of Other Risky Assets
The Reserve Bank of Australia (RBA) decided to cut its key interest rate by 50 basis points to 3.75 percent. The RBA’s action was surprising to traders, who expected a smaller cut of only 25 basis points to 4.00 percent. As a result, the AUDUSD yielded to significant selling pressure.
The central bank’s Board of Governors cited below-trend output growth, moderating inflation rates, and high terms of trade as major prompts for its decision. Decelerating global growth, the RBA judged that reducing the interest rate by 50 basis points as “necessary in order to deliver the appropriate level of borrowing rates.”
Traders had widely expected the rate cut ever since the RBA released its April meeting minutes, which revealed a dovish Board agreeable to a rate cut in the event that the country’s price levels fell. The following week, a weaker than expected CPI report confirmed traders’ expectations that the RBA would cut interest rates.
The RBA’s statement prompted a selloff of the Aussie as market played catch up to price in the unexpectedly large rate cut and traders sought to diminish their exposure to risky assests
Bearish traders pushed the AUDUSD exchange down from 1.0410 to as low as 1.033.