HomeAUD Remains Strong On RBA’s Recent Dovish Tone

AUD Remains Strong On RBA’s Recent Dovish Tone

The Reserve Bank of Australia (RBA) is one of the few remaining central banks in the developed world that keeps delivering its monetary policy every month. The other major central banks pivoted toward the model seen in the United States – every six months, they set the interest rate and adjust the monetary policy, if needed. 

Perhaps the fact that the Australian economy is very dependent on commodity prices makes the RBA reluctant? If we judge by the tight correlation between raw material prices and commodities with the strength of the Australian Dollar (AUD), it looks like a plausible explanation.

RBA’s Dovishness Surprising Despite Faster Economic Recovery

Every first Tuesday of the month, the RBA releases its monetary policy decision and statement. This February, it surprised the markets with an extra dose of dovishness, even though some market participants expected a balanced statement.

Multiple factors led economists to think that the RBA may slow down the accommodation. One would be the sharp recovery in employment seen in the recent months. Another would be the economic performance, much stronger than in the Western world.

None of the above mattered for the RBA. In fact, it did exactly the opposite of what the data showed. As such, it expanded the asset-buying program, or the quantitative easing program, by another AUD 100 billion. Moreover, it vowed to keep the cash rate at current levels, close to zero, until at least 2024.

Perhaps it is the strength of the AUD that forces the RBA to use such a dovish tone. Truth be told, the Aussie pairs are one of the biggest performers on the FX dashboard. That is particularly true in the case of the AUDUSD pair, as it follows the U.S. stock market religiously.

At this point, the FX market’s price action remains dependent on what happens with the U.S. stock market. In behavioral finance, such a phenomenon is known as herding – investors acting and thinking alike, so during such times the correlation between various financial assets increases dramatically.

For the correlation to break, something must happen – an exogenous event or a shift from a major central bank, ideally the Federal Reserve of the United States.

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