The Australian dollar reacted with a new leg higher from the lows despite the fact that the Reserve Bank of Australia did not signal the tapering of its asset purchases. Governor Lowe’s statement was dovish for the local currency.
In a surprising move, the Reserve Bank of Australia (RBA) decided to keep its monetary policy accommodative. The central bank was expected by some market participants to follow in the footsteps of the Bank of Canada and announce a tapering of its asset purchases.
Instead, the RBA decided to keep its policy unchanged. In the speech that followed the decision, the RBA’s Governor Philip Lowe has insisted on the need for ongoing accommodative measures, despite evidence of the economic recovery.
Details of RBA’s Decision
The RBA eased the monetary conditions in Australia during the pandemic via four main strategies. Firstly, it introduced the three-year yield target in March 2020 with the aim of lowering funding costs in Australia.
Secondly, it engaged in further unconventional monetary policy via a quantitative easing and bond purchase programme. Thanks to this programme, the RBA lowered risk-free yields across the yield curve so that borrowers have a lower funding cost.
Thirdly, it lowered the cash rate target by 10 basis points. Finally, it lowered the interest rate on exchange settlement balances to zero per cent.
At this week’s meeting, the market participants focused on the bond purchasing programme. Some voices argued that the RBA would be the next central bank to taper its purchases after the Bank of Canada.
Instead the RBA announced that it would continue purchasing government bonds even after the end of the current bond purchase programme in September. More precisely, it will buy an additional four billion dollars worth of bonds every week until at least November this year.
How Did Australian Dollar React?
This week’s statement was difficult to interpret and trade on. On the one hand, expectations of tapering should have been bullish for the Aussie dollar.
Indeed, the Australian dollar gained ground at the start of the trading week, as seen in the rising AUD/USD pair or the declining EUR/AUD cross. But the strength continued even after the RBA’s announcement, to the surprise of market participants.
On the other hand, the Australian dollar gave back all of its gains, and some more, shortly after the European session started. Toward the end of it and the start of the North American session, the Aussie dollar declined together with the US equity markets.
All in all, the RBA remains accommodative, and the Aussie dollar eventually declined. The attention shifts now to the FOMC minutes later today in the North American session.