RBA Cuts Rates But AUD/USD Soars

It’s definitely a crazy week for rate decisions! Yesterday I gave you previews of the upcoming monetary policy announcements from the BOE and ECB. In today’s edition of Piponomics, I talk about the Reserve Bank of Australia’s most recent move!

As expected, RBA Governor Glenn Stevens announced a 25-basis point rate cut, bringing the bank’s official cash rate down to its 50-year low at 3.00%. The head honcho said that the move only seemed “appropriate” given the economy’s sluggish growth.

Not many were caught off-guard by the RBA’s rate cut. As I had mentioned on Monday, Australia hasn’t seen a lot of bright spots outside of the mining industry. It also doesn’t help that the industry itself is losing steam. With the economy not exactly in tip-top shape, the central bank only deemed it necessary to act in order to bolster Australia’s recovery.

The RBA is hoping to hit two birds with one stone by lowering borrowing costs. Aside from spurring growth in non-mining industries, policymakers are keeping their fingers crossed that the move will help dampen demand for the Australian dollar. Take one look at your AUD/USD chart and you’ll see for yourself that the currency has been on a tear lately. Heck, the RBA itself even described it as being “higher than might have been expected.”

Yesterday’s move marks the fourth rate cut from the RBA for 2012, and the sixth since October 2011. But if you ask me, it’s starting to look like the central bank’s 13-month rate-cutting spree is coming to an end.

Economists from UBS believe that the RBA is already uncomfortable with the idea of further rate cuts. I’d like to think that Glenn Stevens and his chaps would like to save their buffer for more critical times, slashing rates only when the economy really needs support. Besides, if non-mining sectors show improvements in the coming months, they might not even need to slash rates again.

Also, those of you with sharp eyes and good hearing might’ve noticed an important change in the RBA’s statement. Last month, it described monetary policy as “appropriate for the time being,” whereas this month, it said that monetary policy is just “appropriate for now.” Could this be the RBA’s way of hinting at a pause?

In any case, because the next RBA rate statement isn’t due until February next year and the RBA didn’t give any hint of what it plans to do next, many have come to speculate that the RBA will put a halt to further easing at least until Q2 2013.

AUD/USD December 2012 RBA Rate Statement

Contrary to what you’d expect, the 0.25% rate cut led to an AUD/USD rally instead of a selloff. This suggests that the market had already fully priced in the move even before the RBA made the announcement, resulting in a “sell the rumors, buy the news” reaction. This also tells us that traders are really reading a lot into the RBA’s not-so-dovish tone.

Whether you think the RBA has paused its rate-cutting cycle or not, the fact is that we can stop worrying about a rate cut at least until February… which means the Australian dollar has plenty of room to rally if the market decides to take it higher.

1 comment

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