Aussie Swings to Loss as RBA's Lack of Hawkish Talk Disappoints

  • RBA says housing prices have started to ease, and even decline
  • Yen strengthens on report that North Korea will make statement

RBA Holds Key Rate at 1.5%

Australia’s dollar swung to a loss after the central bank kept interest rates unchanged, and disappointed some traders who had bet that it would echo the recent hawkish rhetoric of its major peers.

The Aussie fell as much as 0.7 percent, as investors chased spot lower and hit bids to clear longs from leveraged accounts, according to traders who declined to be named as they aren’t authorized to speak publicly. Traders had increased the odds that the Reserve Bank of Australia will raise rates, following a shift in tone from the European Central Bank, Bank of England and Bank of Canada last week.

“The lack of a hawkish turn should disappoint the market and this is weighing on the Aussie,” said Peter Dragicevich, a currency strategist at Nomura Singapore Ltd. “We continue to think the RBA will lag other central banks given the slack that remains in the economy and subdued inflationary pressures.”

The central bank, which left rates at a record-low 1.5 percent, noted in its statement that housing prices have started to ease and even decline in some markets, suggesting that there’s less pressure to act to dent the growth in debt. While business conditions have improved, consumption growth remains subdued, it said.

  • AUD/USD slumps to a session low of 0.7605, after rising as much as 0.3% to 0.7683 prior to the RBA announcement
    • There’s additional momentum selling under 0.7620, traders say after the statement
  • “The market had gotten ahead of itself,” says Richard Grace, chief currency strategist at Commonwealth Bank of Australia. “The RBA would also have known that AUD/USD would rally toward uncomfortable levels if they had appeared hawkish.”
  • Aussie swung between gains and losses earlier as a report showed retail sales grew more in May than economists forecast
    • Retail sales rise 0.6% M/M; est. 0.2% gain
  • USD/JPY falls 0.2% to 113.11 amid report that North Korea will make important announcement this afternoon
    • Pair was weighed by earlier report that North Korea test-fired a missile that may fall in waters of Japan’s Exclusive Economic Zone
    • USD/JPY climbed to strongest since May 16 on Monday as Treasury yields rose on stronger-than-expected growth in U.S. manufacturing
  • USD/CAD falls 0.2% to 1.2988
    • Bank of Canada governor Stephen Poloz expects inflation to be “well into an uptrend” in 1H 2018 as the output gap in Canada’s economy closes, Handelsblatt reports, citing an interview
  • U.S. markets are closed for Independence Day holiday

— With assistance by Netty Idayu Ismail

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