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Australian Dollar Declines As RBA Hold Reduces Rate Hike Bets

Australian Dollar Declines As RBA Hold Reduces Rate Hike Bets

2017-07-04 05:09:00
Daniel Dubrovsky, Analyst
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Talking Points:

  • Australian Dollar dove as July’s RBA monetary policy announcement was released
  • The central bank maintained that an unchanged policy is appropriate for the time being
  • Local 2-year bond yields declined as interest rate hike expectations were reduced

Have a question about why the Australian Dollar did what it did? Join a Q&A webinar and ask it live!

The Australian Dollar depreciated against its major counterparts following July’s RBA monetary policy announcement. Heading into the interest rate decision, the markets were not envisioning any surprises from policymakers expecting that the main lending rate will be left unchanged. That is exactly what happened.

The Reserve Bank of Australia maintained interest rates at 1.50 percent as expected. Governor Philip Lowe reiterated the status quo that the current monetary policy stance is consistent with sustainable growth and achieving the inflation target over time. Aside from some small changes in the document, the central bank seems to have left its neutral tone unchanged as expected. But why did the Aussie decline?

Overnight index swaps are pricing in at least a 50 percent chance of an RBA rate hike by July 2018, one year from now. Today’s monetary policy announcement likely cooled some of those bets. Indeed, Australian 2-year government bond yields tumbled as the Australian Dollar fell. In addition, the US Independence Day holiday makes for some illiquid market conditions that might have amplified volatility.

Australian Dollar Declines As RBA Hold Reduces Rate Hike Bets

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