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Aussie spurned as RBA refuses to turn hawkish

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The Australian dollar took a spill on Tuesday after the country's central bank stuck with a decidedly neutral outlook for interest rates, wrongfooting speculators wagering it would take a hawkish turn on policy.

[SYDNEY] The Australian dollar took a spill on Tuesday after the country's central bank stuck with a decidedly neutral outlook for interest rates, wrongfooting speculators wagering it would take a hawkish turn on policy.

The Australian dollar fell 0.6 per cent to US$0.7516 after the Reserve Bank of Australia (RBA) ended its July board meeting with no meaningful change to its policy statement.

Some investors had built long positions in the currency in anticipation the RBA might echo its peers in Europe and Canada which had recently hinted at a tightening ahead.

"Markets appeared to be positioned for more optimistic changes to the statement," said Martina Song, a currency analyst at Westpac.

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"With the US dollar stronger and the reaction to the RBA decidedly negative for the currency, the downside support levels of US$0.7590/00 come more closely into focus," she added.

"Near term though, below US$0.7540/60 seems unlikely."

The central bank maintained its balanced view on the economy, predicting growth would pick up only gradually given headwinds from slow wages growth and record household debt.

It even resisted the temptation to highlight a recent run of stronger employment data which had pulled the jobless rate down to a four-year trough of 5.5 per cent.

The market reacted by paring the risk of a hike in the 1.5 per cent cash rate anytime soon, with interbank futures showing just a 4 per cent probability of a move by Christmas.

Australian government bond futures likewise edged higher, with the three-year bond contract up three ticks at 98.040. The 10-year contract added two ticks to 97.3550, inching away from two-month lows.

The New Zealand dollar followed the Aussie lower, in part as investors lengthened the odds of the Reserve Bank of New Zealand going hawkish in the next few months.

The kiwi eased to US$0.7268 and away from a top of US$0.7345 touched on Monday.

"The USD remains fairly well bid and we think NZD/USD is on borrowed time up here given moves seen in bond markets and the shifting tone of the major central banks," said Philip Borkin, senior economist at ANZ Bank.

The next hurdle was a fortnightly auction for dairy, the country's main goods export earner, which will be held in the early hours of Wednesday morning.

A quarterly survey of local business opinion released on Tuesday showed business confidence was steady in the second quarter, while the number of firms expecting to raise prices had fallen.

New Zealand government bonds gained, sending yields 2.5 basis points lower at the long end of the curve.

REUTERS

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