HomeRBA Keeps a Dovish Tone, Weighs on the Australian Dollar

RBA Keeps a Dovish Tone, Weighs on the Australian Dollar

One of the most respected economic reports in the world is the World Economic Outlook (WEO) released by the International Monetary Fund (IMF). This week marks the virtual IMF meetings, and so the release of the April report came just in time. 

Rising yields in the United States led to similar reactions in the advanced economies. However, not all central banks are willing to stay indifferent as the Fed does.

One such bank is the RBA, which delivered an ultra-dovish message in March, crushing bond sellers in a desperate attempt to contain the rise in the yields. The problem is that rising yields bring unwanted tightening in financial conditions. Even the ECB mentioned such developments, although the European Central Bank was more relaxed than the RBA.

The RBA has a point, though – the Australian dollar (AUD) emerged as one of the strongest currencies during the pandemic. As long as the commodity prices kept rising (e.g., gold, copper), the strength of the AUD against its peers did not worry the RBA so much. But lately, the commodity market prices stopped rising and even declined – not so much the AUD, posing a problem for the RBA.

RBA Warns About the Australian Dollar’s Strength

A central bank looks at many aspects before delivering its monetary policy. One of these aspects is the exchange rate, with the rate against the U.S. dollar, the most important one.

Traders should remember that the ECB delivered numerous verbal interventions in late 2020 when the EURUSD reached levels above 1.23. Without doing anything else to fight the rise, the verbal intervention did work as the euro declined to 1.17 against the greenback.

The RBA is also known for its verbal interventions in the past. This is why the fact that it hinted at the AUD strength at this week’s meeting should be a warning for AUD bulls.

More precisely, the RBA mentioned in the statement that the Australian dollar remains in the upper end of the range in recent years. Note that the central banks consider multiple years on the statement, which indirectly puts pressure on the AUD pair.

Speaking of the AUD pairs, there was little or no reaction to the RBA’s statement. However, this is not unusual, as even in March, when the RBA delivered the ultra-dovish statement, the AUD ignored the message.

Will this time be different?

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