[SYDNEY/WELLINGTON] The Australian dollar rose more than 1 per cent on Tuesday after the Reserve Bank of Australia (RBA) did not offer a clear bias to ease policy again as some in the market had been wagering on, sparking a swift short squeeze.
The RBA kept rates at 2 per cent a month after cutting them to all-time lows, saying policy needed to be stimulative given sub-standard economic growth, a high currency and tame inflation.
The Australian dollar gained nearly a full cent to a peak of US$0.7693 in the wake of the news. Resistance is now found at US$0.7730 with support at the seven-week trough just under 76 US cents touched on Monday.
The Aussie also made sharp gains on the yen and New Zealand dollar, while the euro and pound dropped around 1 per cent against the Aussie. "It is a relief rally because the RBA did not introduce an explicit easing bias and that has widened the odds of more rate cuts in the short term," said Elias Haddad, a senior strategist at Commonwealth Bank of Australia.
Interbank futures imply a one-in-four chance of a cut by August, from 40 per cent before the RBA decision, with the probability rising to 72 per cent by Christmas.
Aussie strength dragged the New Zealand dollar higher to US$0.7123, pulling away from a four-and-a-half year low of US$0.7072 set on Tuesday. The kiwi shed 3 per cent last week, partly on rising expectations the Reserve Bank of New Zealand might cut rates at a policy meeting on June 11.
"We are sceptical that the full extent of the decline is justified - the broader fundamental picture has changed little," Bank of New Zealand strategist Raiko Shareef said in a note. "But with a broader US dollar upswing in motion, and now-strong technical resistance just below US$0.72, we would not play against current momentum." Markets are pricing in a 52 per cent chance the RBNZ will cut rates by 25 basis points at next week's review.
The market took in its stride data showing that New Zealand's terms of trade rose 1.5 per cent in the first quarter, as import prices fell faster than export prices.
New Zealand government bonds were a touch softer, with yields a tick higher along the curve.
Australian government bond futures retreated from one-month highs, with the three-year bond contract off 6 ticks at 98.060. The 10-year contract was down 3.5 ticks at 97.2600 in a bearish flattening of the curve.