Aussie Dollar Gains as RBA Pours Cold Water on Rate Cut Bets

Talking Points

• The Australian Dollar rallied across the board after RBA meeting minutes
• Board members decided to cut rates in May instead of awaiting further data
• Front-end government bond yields rallied supporting decreased rate cut bets

Having trouble trading the Australian Dollar? This may be why.

The Australian Dollar rallied against its major peers after the Reserve Bank of Australia released its minutes from the May monetary policy announcement. The central bank cut rates for the first time in a year, citing recent underperforming inflation data as a concern. This led to heightened speculation about further rate cuts to follow.

The minutes revealed that board members made a decision between cutting the main lending rate or awaiting further information. The central bank said that prices are expected to remain around 1 to 2 percent over 2016, picking up to 1.5% – 2.5% by the middle of 2018. Members noted that the outlook for domestic economic conditions has been left little changed. On the international front, the RBA said that growth in Australia’s major trading partners was likely to be a little softer than previously thought.

After the meeting minutes crossed the wires, Australian 2-year government bond yields rallied more than 2 percent. With overnight index swaps pricing in at least one rate cut over the next year, this means that today’s minutes poured cold water on near-term policy easing bets. June’s RBA rate decision could clear up how the central bank will continue approaching monetary policy.

Meanwhile, the DailyFX Speculative Sentiment Index (SSI) is showing a reading of 1.5 following the announcement, meaning that for every trader short the AUD/USD, there are 1.5 on the long side. The SSI is a contrarian indicator, implying further AUD/USD weakness ahead.

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