Australia’s dollar strengthened as central bank Governor Glenn Stevens kept interest rates on hold for a second month, confounding traders’ expectations of a cut.
The currency began to climb about a minute before the Reserve Bank of Australia announced that it left the cash rate at a record-low 2.25 percent. The Aussie rose as much as 1.6 percent and strengthened against all its 31 major counterparts. While 17 of 30 economists in a Bloomberg News survey correctly predicted the decision, swaps traders were pricing a more than 75 percent chance of a cut.
“The Aussie dollar has been lifted by RBA’s decision to stand pat, but we expect the bounce to be temporary,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “With commodity prices continuing to adjust lower and the RBA likely to still ease further, the currency remains vulnerable.”
Australia’s currency gained 1 percent to 76.71 U.S. cents at 9:54 a.m. in London. The nation’s three-year bond yield surged eight basis points, or 0.08 percentage point, to 1.75 percent after dropping to a record 1.614 percent earlier Tuesday. The Australian Securities and Investments Commission said it would look into the currency movement ahead of the RBA announcement.
The Aussie strengthened 1.7 percent to 1.4150 per euro and climbed 1.4 percent to 92.01 yen. The U.S. dollar appreciated 0.6 percent to $1.0858 per euro.
“Further easing of policy may be appropriate over the period ahead, in order to foster sustainable growth in demand and inflation consistent with the target,” RBA Governor Glenn Stevens said in a statement following Tuesday’s decision. “The board will continue to assess the case for such action at forthcoming meetings.”
Stevens identified 75 cents as his preferred exchange rate in an interview with the Australian Financial Review on Dec. 12. The Aussie’s 2 percent slide prior to Tuesday’s RBA decision since the previous meeting on March 3 pales in comparison with the 25 percent plunge in iron ore, Australia’s biggest export.
Interbank futures show traders anticipate the cash target will decline to 2 percent by June, following the release of quarterly inflation data on April 22.
Australia’s dollar jumped 1.3 percent to NZ$1.0197 after depreciating to NZ$1.0021 on Monday, the lowest since the two currencies were freely floated in the 1980s. The prospect of further interest-rate cuts in Australia had sent the Aussie sliding toward parity with the kiwi.
“It was guaranteed given how divided the market was in terms of today’s decision that it was going to cause a fair amount of volatility,” said Sue Trinh, senior currency strategist at Royal Bank of Canada in Hong Kong. “So it’s unsurprising with the actual decision that we did get, it’s been a clear boon for the Aussie.”
Hedge funds and other large speculators reduced their net wagers on Aussie declines to a six-month low of 24,356 in the week through March 31, according to the latest data available from the Commodity Futures Trading Commission in Washington.
The central bank unexpectedly cut rates in February and refrained from easing again last month, amid risks the housing market may overheat.
The RBA has lowered its benchmark rate by 2.5 percentage points since late 2011 to smooth a transition from resources investment to non-mining industries and to limit strength in the nation’s currency.
“A weaker Aussie dollar will be more effective for the economy, but low commodity prices may not lead to enough currency depreciation,” Jasmin Argyrou, a Sydney-based senior investment manager at Aberdeen Asset Management, wrote in an e-mail. “Eventually the cash rate will need to be lowered further.”