SYDNEY: The Australian dollar took a dive on Tuesday after the country’s central bank sounded more dovish on the outlook for interest rates, sparking a rally in bonds as markets wagered on the prospect of an earlier easing.
The Reserve Bank of Australia (RBA) concluded its December board meeting by keeping rates unchanged at 4.35%, where they have been all year, but dropped a previous reference for policy needing to stay restrictive.
Instead, it noted that recent data had given the board “some confidence” that inflation was heading back toward its 2% to 3% target band as long desired.
Analysts had thought there was a chance the RBA might take a dovish turn given recent disappointing data had undermined its forecasts of an economic pick up ahead.
A survey of businesses out on Tuesday showed conditions took a marked turn for the worse in November with most industries reporting weaker sales and profits.
Three-year bond futures climbed 7 ticks to a two-month high of 96.294 as markets moved to imply a 55% chance of a quarter-point cut at the next RBA meeting in February.
A move in April was more than fully priced, with markets seeing a chance of rates reaching 3.85% by May.
The Aussie quickly slipped 0.8% to $0.6388, erasing an overnight rally made when Beijing opened the door to looser policy in China. Major resistance is up at $0.6527, with support at last week’s four-month low of $0.6373.
Australian dollar pinned near one-year lows ahead of RBA rate decision
Across the Tasman, the Reserve Bank of New Zealand has already slashed rates by 125 basis points to 4.25% and markets imply a 59% chance it will ease by another 50 basis points when it next meets in February.
The kiwi dollar followed with a drop of 0.6% to $0.5831 , again unwinding an overnight bounce.
Support comes in at $0.5805, with resistance at $0.5889.
Both the Aussie and kiwi had jumped overnight when Beijing surprised markets by saying it would adopt an “appropriately loose” monetary policy, the first easing of its stance in some 14 years.
China is the Antipodeans biggest export market and anything that promises to boost demand is viewed as positive for trade and the currencies.
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