Australian Dollar Rises After RBA Holds Rates; Bonds Pare Gain

The Australian dollar rose after the Reserve Bank left interest rates unchanged and signaled a period of steady borrowing costs.

Government bonds pared gains, with the three-year rate rebounding from the lowest since September, before the RBA releases its quarterly statement on policy on Feb. 7. New Zealand’s kiwi dropped to the weakest in more than seven weeks versus the Aussie after Finance Minister Bill English said the government of the smaller nation is “not comfortable” with the currency’s strength.

“They have dropped the reference to the exchange rate being uncomfortably high, so that’s definitely more hawkish,” Divya Devesh, a foreign-exchange analyst at Standard Chartered Plc in Singapore, said of the RBA statement. “While earlier they were keeping the door open on more easing, now they are trying to say it’s the end of the current easing cycle. We’ve seen the Aussie rally on back of that.”

The Australian dollar climbed 1.5 percent to 88.81 U.S. cents as of 5:31 p.m. in Sydney. The currency advanced 1.4 percent to 89.61 yen. It strengthened 1 percent to NZ$1.0931, after reaching NZ$1.0948, the highest level since Dec. 12.

New Zealand’s dollar gained 0.5 percent to 81.23 U.S. cents. It strengthened 0.4 percent to 81.96 yen.

Australia’s 10-year bond yield was at 4 percent, compared with 3.96 percent right before the RBA’s decision. The three-year rate added 4 basis points, or 0.04 percentage point, to 2.89 percent, after earlier dropping to as low as 2.78 percent, the least since Sept. 30.

Interest Stability

“Monetary policy is appropriately configured to foster sustainable growth in demand and inflation outcomes consistent with the target,” RBA Governor Glenn Stevens said in the statement after keeping the overnight cash-rate target at 2.5 percent, in line with economists’ estimates. “On present indications, the most prudent course is likely to be a period of stability in interest rates.”

Inflation in Australia accelerated in the final three months of last year to above the midpoint of the central bank’s 2 percent to 3 percent target range. The RBA is due to release its updated inflation and growth forecasts in its quarterly statement on monetary policy.

Interest-rate swaps data compiled by Bloomberg show traders see a 7 percent chance the central bank will lower its benchmark from 2.5 percent next month.

“Given the RBA’s comments about the improving global and domestic growth outlooks and clear upside risks to the local inflation outlook, we believe the RBA will begin the process of monetary policy normalization commencing late in 2014,” with a 25 basis point increase, John Peters, a senior economist at Commonwealth Bank of Australia, the nation’s biggest lender, wrote in a report today. “More rate rises are likely to follow in early 2015.”

Kiwi Underperformance

The Reserve Bank of New Zealand, which refrained from raising rates last month, next meets on March 13.

“Until that time, when we expect them to hike by 25 basis points, markets are unlikely to price in any further New Zealand tightening,” Imre Speizer, a market strategist at Westpac Banking Corp. said of RBNZ. “The kiwi could get a boost then, but until then, I suspect the Aussie will be the outperformer, partly because of the change in bias by the RBA.”

New Zealand’s two-year swap rate, a fixed payment made to receive a floating rate, slid 2 basis points to 3.81 percent.

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