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Australian dollar dips, bonds rally as RBA maintains interest rates

May 7, 2024

7th May 2024

Key points:

  • The Australian dollar fell slightly following the RBA’s decision to keep interest rates unchanged.
  • Australian bond prices rose, and futures markets adjusted their expectations for further rate hikes downward.

RBA’s rate decision

On Tuesday, the Australian dollar experienced a decline, losing a quarter of a cent to $0.6603, after the Reserve Bank of Australia decided to keep the cash rate steady at 4.35%.

This rate has been unchanged since a hike in November of the previous year. While this decision was widely anticipated, with 24 out of 25 analysts polled by Reuters predicting no change, the market had speculated that the RBA might adopt a more hawkish stance due to recent higher-than-expected inflation figures.

Market reaction

Despite expectations, the RBA did not reintroduce an explicit tightening bias. Instead, it maintained a similar tone to its March meeting, stating it was open to adjusting rates if necessary but emphasised vigilance over inflation risks.

This caused futures markets to significantly reduce the likelihood of a rate hike in the near term, with the probability dropping from around 40% to 16%.

In response to the RBA’s less hawkish stance, Australian bond futures for three years rose sharply, gaining 8 ticks to 96.060. The yield on 10-year bonds fell by 7 basis points to 4.32%, moving away from a recent five-month high of 4.55%.

Economic forecasts

Contrary to the RBA’s statement, its economics unit released forecasts that seemed more hawkish. They do not anticipate rate cuts until mid-2025, which is nine months later than previously predicted.

These forecasts suggest the RBA is prepared to respond to any unexpected increases in inflation and is observing tighter labor market conditions than in their earlier projections.

The market’s expectations for the RBA starkly contrast with those for the U.S. Federal Reserve. Futures markets are pricing an 80% chance of a U.S. rate cut by September, with 43 basis points of easing expected within the year. This difference highlights divergent economic conditions and monetary policy outlooks between the two countries.

Related: Fed Maintains US Interest Rates

Outlook for NZD

Meanwhile, the New Zealand dollar remained stable at $0.6011, closely approaching last week’s high of $0.6050. Resistance is seen near its April peak of $0.6084, indicating potential upcoming movements based on broader market sentiment and regional economic developments.

As the financial landscape adjusts to the latest decisions and forecasts from the Reserve Bank of Australia, opportunities for trading in the currency and bond markets are emerging.

With the Australian dollar experiencing fluctuations and bond yields shifting, now is a crucial time for traders to engage and potentially benefit from these movements.

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