Aussie drops as RBA sounds dovish tone in busy cenbank week

LONDON (Reuters) – Australia’s dollar fell on Tuesday after the Reserve Bank of Australia sounded a more dovish tone than expected, in the first of several meetings of central banks this week.

FILE PHOTO: An Australia dollar note is seen in this illustration photo June 1, 2017. REUTERS/Thomas White/Illustration

Attention now turns to the U.S. Federal Reserve, which kicks off its two-day meeting on Tuesday and is expected to announce the start of tapering its asset purchases. Markets are also pricing in an interest rate rise at the Bank of England meeting on Thursday.

Investors in recent weeks have priced in a wave of tightening from central banks as they bet policymakers are sufficiently concerned about rising inflation to end pandemic-era levels of easing.

Australia’s central bank did not display that hawkish pivot many had expected, sending the Aussie dollar down as much as 0.8% to $0.7457, its weakest since Oct. 22.

The RBA stressed that inflation was still too low, although it also omitted its previous projection that rates were unlikely to rise until 2024 and dropped a key target for the April 2024 government bond.

Analysts said the message was still more hawkish than previous RBA meetings, even if not as hawkish as markets had anticipated.

“Unlike other central banks (like the ECB recently), the RBA’s message was successful in at least marginally scaling down hawkish bets, although markets are still pricing in 76bp (basis points) of tightening in the next 12 months,” said ING analysts in a note.

They said there was a gap between the performance of the currency and interest rates, with last week’s jump in the dollar comparatively small when interest rates rose, and the currency now “over-discounting the post-RBA correction in yields”.

The short-term risk for the Aussie “skewed to the upside”, they added.

New Zealand’s dollar also dropped sharply, losing 0.8% to $0.7130, a two-week low.

Currency markets elsewhere largely treaded water as they waited to see whether policymakers were ready to dial back stimulus.

The dollar index traded marginally higher at 93.996.

The euro edged 0.1% lower to $1.1593.

Sterling was on the back foot, slipping 0.3% to $1.3627.

The dollar weakened 0.3% to 113.68 yen, continuing to consolidate below an almost four-year peak of 114.695 reached on Oct. 20.

Elsewhere the Swiss franc briefly hit a new 18-month high versus the euro. The single currency dropped to as weak as 1.0544 francs — the lowest since May 2020 — before it bounced back to trade at 1.0581, up 0.3% on the day.

The franc has been strengthening versus the U.S. dollar too, although it was down 0.3% on Tuesday.

Marshall Gittler, Head of Investment Research at BDSwiss Holding, noted that sight deposits data suggested the Swiss National Bank — which worries about a stronger franc hurting its economy — was not intervening as actively to arrest the franc strength as it had during previous moves higher.

“This could be the way the SNB goes along with the global trend toward tighter monetary policy, only doing it through the exchange rate rather than through its policy rate,” he said.

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