Australian dollar buffered by short covering after RBA keeps rates at 2 per cent

The Australian dollar has gained almost 11 per cent in value against its US counterpart since the start of the year. Photo: Glenn Hunt Haruhiko Kuroda, governor of the Bank of Japan, faces a yen at the highest level in 17 months. Photo: Yuriko Nakao
Nanjing Night Net

If the Reserve Bank of Australia thought some timid talk would be enough to send the Australian dollar lower, they were wrong.

The currency rallied before settling at around US76¢, the same level it commanded before the RBA policy decision. Foreign exchange experts attributed the immediate rise to a short squeeze where traders who were betting governor Glenn Stevens would jawbone more forcefully had to cover their positions.

The language of the policy statement was softer than anticipated given the rise in the Australian currency during the first quarter. It has advanced around 4.3 per cent against the United States dollar this year.

Ben Jarman, a senior economist at JPMorgan, said that the shift in the language of the statement was not enough to convey deep concern within the central bank.

“The fact they spoke about the Aussie dollar complicating the adjustment in the economy tells us it’s not one way traffic,” Mr Jarman said, highlighting the rise in commodity prices and the stability in economic data.

“That tells us the RBA would like the Aussie lower,” but it is not persistently high enough to demand a policy response yet.

Mr Stevens, in his April statement on Tuesday, said: “under present circumstances, an appreciating exchange rate could complicate the adjustment under way in the economy”.

That has evolved from: “the exchange rate has been adjusting to the evolving economic outlook” in the March statement.

There is no apparent change in the RBA’s policy bias, which is that low levels of inflation provide “scope” for interest rate cuts if needed. The Australian cash rate is at a record low 2 per cent.Trade-off needs to be convincing

“They’ve been telling us for a while that rate cuts are a possibility,” Mr Jarman said. “It’s been a while now where they’ve shown you even though they can move, they’re not necessarily inclined to.”

As the rotation away from mining-led investment plays out, the strategist pointed to previous comments by Mr Stevens that suggested the trade-off in lowering rates had to be convincing.

“There’s maybe an element of wanting to not use your remaining ammunition unless it’s necessary,” Mr Jarman said.

“[The governor] said before they would lower rates if they thought that was helpful but they don’t view that trade-off as being worth it. To do that just to juice up inflation a bit in the near term might not be the best policy settings.”

Over three days, the Australian currency has peaked at US77.5¢ and traded as low as US75.70¢. It was at US75.96¢ late on Tuesday which also saw India’s central bank cut rates by one-quarter of a percentage point.

Meanwhile, optimism around the yen was supported by comments from Bank of Japan governor Haruhiko Kuroda around the potential for expanding monetary stimulus. The yen is at the highest level in 17 months against the greenback, up 8.05 per cent in 2016. The US dollar is buying ¥110.64.

This has been exacerbated by a more dovish Federal Reserve which in the eyes of the futures market will not raise rates this year, narrowing interest in the US dollar.

“The Fed have a lot of flexibility,” Mr Jarman said.

This story Administrator ready to work first appeared on Nanjing Night Net.

Comments are closed.