Australia’s dollar strengthened for the first time in five days as traders speculated the central bank is finished cutting interest rates after lowering them to a record on Tuesday.
The currency jumped as much as 1 percent versus the greenback and appreciated against all its major 31 major counterparts, after the RBA reduced its benchmark rate by a quarter point to 2 percent. The yield on Australia’s three-year bond rose above the rate for the first time since November, while swaps traders pared bets that the RBA will cut borrowing costs again by October.
“The market is interpreting the statement as the RBA being on hold for the foreseeable future,” said Sue Trinh, senior currency strategist at Royal Bank of Canada in Hong Kong. “There were further rate cuts built into the curve. With this statement there may be a bit of unwinding in those expectations.”
Australia’s currency climbed 0.4 percent to 78.66 U.S. cents as of 7:40 a.m. in London after strengthening to 79.18. The yield on its three-year sovereign debt rose as much as 13 basis points to 2.04 percent, the highest since Jan. 28.
Swaps traders reduced the odds that the RBA will reduce rates again by October to about 50 percent, from about 60 percent on Monday.
They had priced in better than 70 percent odds of a cut on Tuesday before the decision, while 25 of 29 economists had predicted the same.
Governor Glenn Stevens said in an accompanying statement that “available information suggests improved trends in household demand over the past six months and stronger growth in employment.” That contrasts with his February comments, which followed the RBA’s last rate cut, that expansion was “continuing at a below-trend pace, with domestic demand growth overall quite weak.”
“Now the question people are starting to ask is: has the RBA adopted a neutral bias?” said Jonathan Cavenagh, a currency strategist at Westpac Banking Corp. in Singapore. “I expect to see a further squeeze in short Aussie dollar positions. Maybe over the next 24 hours we’ll give that 80-cent level a bit of a look.”
The Aussie strengthened 3.9 percent in April, its biggest monthly gain in more than a year, after the RBA refrained from cutting rates that month. Pressure has built for more stimulus as iron ore, the country’s biggest export earner, remained about 65 percent below the peak reached in 2013, even after rallying from its April 2 trough.
The RBA will release its updated quarterly forecasts May 8. In February, when Stevens cut the cash rate for the first time in 18 months, he cited the downgrade in growth forecasts in that month’s Statement on Monetary Policy.
Hedge funds and other large speculators raised their net wagers on Aussie declines to 27,405 contracts last month, compared with 24,356 at the end of March.
Core inflation remains at the lower end of the RBA’s 2 percent to 3 percent annual target and the CPI rose closer to 1 percent on a year-on-year basis, data last month showed.