Aussie Ends Two-Day Advance as RBA Stands Pat; Yen Strengthens

  • RBA keeps benchmark rate at 1.75%, awaiting inflation data
  • Japan’s currency advances against all 16 of its major peers

Australia’s dollar snapped a two-day advance as the central bank kept its benchmark rate at a record low and reiterated an appreciation of the currency could complicate a recovery.

The Aussie dropped as RBA Governor Glenn Stevens left the cash rate at 1.75 percent Tuesday, as forecast by every economist surveyed. It said “over the period ahead, further information should allow the board to refine its assessment of the outlook for growth and inflation and to make any adjustment to the stance of policy that may be appropriate.” The yen rose against the dollar as focus turned back to political uncertainty in the U.K. and worries over the health of Italian banks.

“Nothing in the statement alters the view that a soft Q2 CPI inflation outcome is required to get a cut over the line,” said Ray Attrill, co-head of FX strategy at National Australia Bank Ltd. in Sydney.  “With almost all of the market expecting an August rate cut, the detection of an easing bias in the last para isn’t strong enough to readily validate the expectations. Hence Aussie ticked higher initially and then fell back.”

The Aussie fell 0.2 percent to 75.21 U.S. cents as of 7:05 a.m. in London. It gained 1.2 percent in the past two sessions, helping pare its loss since the U.K. referendum.

Inflation Outlook

The Reserve Bank last cut rates in May after an official report showed a quarter-on-quarter decline in consumer prices, while core measures of inflation slowed to the weakest pace on record. Second quarter inflation data are due July 27 and may influence the central bank’s August decision.

Australia’s currency also declined as rating agencies warned the nation’s top credit score may be at risk unless the budget deficit is reined in by the eventual winner of the national election over the weekend.

“There are a number of factors that should cap the Aussie,” said Robert Rennie, the global head of currency and commodity strategy at Westpac Banking Corp. in Sydney. “The risks of political gridlock; the risks of negative commentary from the ratings agencies; risks of a hit to consumer and business sentiment from all this.”

Yen Gains

Japan’s currency advanced against all 16 of its major peers as the Topix index of Japanese shares declined 0.4 percent, adding to demand for haven assets. The yen gained 0.5 percent to 102.01 per dollar.

One of the leading proponents for Brexit, Nigel Farage, quit on Monday as the leader of the U.K. Independence Party. Regulators are pressing Italian banks to clean up their balance sheets and build up buffers against losses after the British vote to leave the European Union exacerbated a selloff in the lenders.

“Markets are concerned about what’s going on in the U.K. and there’s more uncertainty about Italian banks,” said Vishnu Varathan, a senior economist at Mizuho Bank Ltd. “Those who wanted to exit don’t have a game plan and they’re leaving the stage. It just highlights the parlous state of political affairs that the U.K. risks descending into. There’s a check on the market rally we saw last week.”

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