Australian Dollar Sinks Despite RBA Scrapping Bond Yield Target, Where to for AUD/USD

Australian Dollar, AUD/USD, RBA, Yields, Commodities, ASX 200 – Talking Points

  • The RBA left the cash rate at 0.10%, but abandoned yield curve control
  • Asset purchases to remain at AUD 4 billion per week until February 2022
  • AUD/USD moved to the bottom of the recent range. Will it break lower?

The AUD/USD was lower in the aftermath of a less dovish RBA. In one of the most highly anticipated RBA monetary policy meetings of recent times, the RBA abandoned the yield curve control component of monetary policy.

They will no longer target 0.10% on the April 2024 Australian Commonwealth Government bond. The cash rate was left unchanged at 0.10% and they kept the amount of government debt asset purchases to a rate of AUD 4 billion a week at least until mid-February 2022.

Of the bond that the bank will no longer be targeting, they already own circa AU$ 18 billionof the AU$ 32.9 billion issue.

RBA Governor Phillip Lowe has previously said that there will not be a hike in the cash rate before 2024. He will be giving a press conference via webinar at 5:00 GMT later today. It’s possible that timeline guidance might be re-assessed as well.

Last week, 3rd quarter headline inflation came in at 0.8% q/q against expectations of 0.8%. The annual headline rate came in 3.0% y/y versus 3.1% forecasted.

The RBA’s preferred measure, trimmed mean, printed at 0.7% q/q instead of 0.5% anticipated, which made the annual read 2.1% y/y against 1.8% expected. It was this beat on trimmed mean that likely led to the bond market rout.

The language in the statement today on inflation remains relatively subdued. They do not see their preferred measure of trimmed mean getting above 2.25% until 2023.

Prior to the meeting, the S&P/ASX 200 was lower and testing trend line support but has since steadied.

Australian 10-year government yields remained steady at around 1.96% after the RBA announcement. The spread to US 10-year government yields remains favourable for AUD/USD.

AUD/USD AND AU-US 10 CHART

Australian Dollar Sinks Despite RBA Scrapping Bond Yield Target, Where to for AUD/USD

Chart created in TradingView

3rd quarter GDP, due for release on December 1st, is likely to be a soft number as Covid-19 restrictions were at their most severe. Lockdown restrictions have now eased throughout the 2 most populous states of New South Wales and Victoria.

As a result, economic activity for the 4th quarter could be of more importance to the RBA going forward.

The central bank previously commented that the effects of the current outbreak of the Covid-19 Delta variant is seen as a short-term issue for economic disruption. In today’s statement, they acknowledged that health impacts could still impact the recovery from the pandemic.

Looking ahead, there is building approvals out tomorrow, then retail sales and the trade balance to be released on Thursday.

— Written by Daniel McCarthy, Strategist for DailyFX.com

To contact Daniel, use the comments section below or @DanMcCathyFX on Twitter