Aussie slides as RBA affirms dovish stance

On Tuesday, the Australian dollar fell after the country’s central bank reduced investor expectations for a hawkish tilt. This started a busy week of monetary policy decisions that included the Federal Reserve and the Bank of England.

The Australian dollar fell as far as 0.47 percent before closing 0.23 percent lower at $0.75025. Last week, it reached a high of $0.75555, a level not seen since July 6. Persistent inflation fueled speculation that the Reserve Bank of Australia might hike the introductory rate as early as next year.

The central bank emphasized that inflation remained too low. Still, it also deleted its earlier prediction that rates would not rise until 2024 and reduced a crucial objective for the April 2024 government bond auction. The RBA made every effort to sound dovish” in its policy statement, “so there’s an attempt to push back on market pricing.”

The risk is that the Australian dollar will continue to fall in the near term. The kiwi dollar fell 0.18 percent to $0.71705 in New Zealand. A similar inflation conundrum looms over other central banks.

The Fed will hold a two-day meeting later on Tuesday, which is likely to announce a tapering of asset purchases. The BOE will meet on Thursday, with markets pricing in a bit of rate hike.

Currencies

The dollar index (DXY) measures the value of the US currency against a basket of six major currencies. It was was practically flat at 93.925, down 0.25 percent from Monday, when it fell from a two-and-a-half-week high of 94.313.

Sterling was on the defensive, falling 0.07 percent to $1.3649.

The euro also fell 0.07 percent to $1.15995.

The dollar fell 0.07 percent to 113.915 yen, consolidating below an almost four-year high of 114.695.

Eurozone bond yields fall sharp

Government bond yields in the eurozone fell on Tuesday. It gave markets a break from a violent selloff that has driven borrowing costs considerably higher on increased inflation and interest rates predictions.

Bond rates have risen across the EU as European Central Bank director Christine Lagarde disappointed expectations of a forceful rebuttal to aggressive market pricing for two 10-basis-point rate hikes next year, contradicting the ECB’s policy direction. 

Furthermore, short-term Australian government bond yields decreased after the Reserve Bank of Australia took a significant step toward dismantling extraordinary economic stimulus. However, it urged patience and rejected market chatter of a rate move as soon as May 2022.