Talking Points:
- Australian Dollar spikes down, then recovers on RBA rate decision
- Initial weakness likely reflects forceful rhetoric about appreciation
- Subsequent recovery speaks to AUD’s lasting yield-seeking appeal
The Australian Dollar spiked briefly lower after the RBA dialed up rhetoric aimed at talking down the currency in the statement accompanying today’s monetary policy announcement. Governor Philip Lowe said that recent appreciation will “contribute to subdued price pressures”. He added that further gains “would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.”
The move lower would prove short-lived, with the Aussie swiftly recovering to trade at levels prevailing before the announcement crossed the wires. While the central bank is in no hurry to hike rates – arguing that wage growth will remain subdued for some time while supervisory measures meant to cap household debt and cool the housing market are proving to be effective – it is likewise averse to cutting them.
The resulting standstill makes the Aussie appear attractive for yield-seeking investors in an environment where most G10 central banks have a very long way to go to erode the currency’s rate advantage. Indeed, the US Dollar had been the only currency aiming to close the gap between its baseline lending rate and that of the Australian unit, but recent skepticism about the Fed’s hawkish credentials have put that in doubt.
Retail traders expect Aussie Dollar weakness. Find out here what this hints actual price trends!
AUD/USD vs. Australia-US 10-year bond yield spread (15min chart)
Chart created with TradingView
--- Written by Ilya Spivak, Currency Strategist for DailyFX.com
To receive Ilya's analysis directly via email, please SIGN UP HERE
Contact and follow Ilya on Twitter: @IlyaSpivak
