The Australian dollar is briefly rose above 0.6700 today after the RBA opted to leave interest rates unchanged.
It’s atypical for a currency to rise after a rate cut and — as you can see from the chart — the Australian dollar initially fell on the announcement.
AUD/USD 10 min
I think a portion of the move is a ‘buy the fact’ trade. The commentary from Terry McCrann certainly looked like a leak yesterday and that led to some AUD selling. The rebound may have been underpinned by short-term profit taking in a market that was thinned out by a US holiday.
I’ll also entertain the idea that the market is no longer rewarding rate hikes because of the economic risks.
At the top of the hiking cycle, the risk of going to far may outweigh the risk of not killing inflation and I believe we’re at that point on a few fronts. That’s something to keep in mind ahead of next week’s similarly-close Bank of Canada rate decision.
The thinking is that another hike would be a step too far and raise more financial risks, especially in a heavily-indebted housing market like Australia. A hike now, instead, would set up an undershoot in inflation down the line, diminishing currency attractiveness. There’s also an element of growth-friendliness in keeping rates at moderate levels rather than stomping it with overly-hawkish policies.
So you could say that the market is arguing that inflation is over and that hiking further now is needless and will ultimately be counterproductive to a price-stability regime.
At this point, I wouldn’t be overly confident about that thinking but next week’s BOC will be another opportunity to test it.