RBA Holds Rates Steady: What Now?

In a surprising turn of events, the Reserve Bank of Australia (RBA) announced yesterday that they have decided to keep rates steady at 4.25%. This was opposite of the market’s expectation that the RBA would cut interest rates again for the third time in a row.

Analysts had believed that because of the debt turmoil in the euro zone and its potential negative effects on global demand, the RBA would have had no choice but to cut rates. However, it appears that central bank has something different in mind…

According to the RBA, despite the events in Europe, recent data from the U.S. hints that there would be moderate expansion. They also cited that most economic indicators in China were “quite robust” during the third and fourth quarters of 2011. And lastly, the bank was concerned about commodity prices. While they have fallen off their highs, they are still at high levels and are showing signs of rising again.

Naturally, the Aussie soared higher immediately after RBA Governor Glenn Stevens delivered the RBA’s statement. AUD/USD rose nearly 100-pips, retesting the previous week’s high and touching the 1.0800 handle.

AUD/USD Chart

However, there was no follow through in the London or New York sessions as AUD/USD consolidated for the rest of the day. This was a little surprising as we saw other higher yielding currencies (like the euro and pound) rally hard on rumors that Greek officials were drafting an agreement with the EU, ECB, and IMF for more bailout funds.

One would have thought that the combination of keeping rates steady and the bullish risk appetite environment would have sent the Aussie way past the 1.0800 handle, but that wasn’t the case yesterday.

Part of the reason why some currency playas may have been reluctant to put on heavier long Aussie positions may have been due to the fact that the central bank actually left the door open for more easing measures down the road. Evidently, the RBA is taking a cautiously optimistic approach with regards to its monetary policy and for now, will be implementing wait-and-see tactics.

In the end, it will really depend on how on-target Glenn Stevens and the rest of the RBA are in its predictions. If they are correct and we see sustainable and moderate growth from the U.S. and China, as well as debt concerns unwind in Europe, then there’s every reason to believe that the Aussie could continue to trend up the charts, much like it has for the past six weeks.

Don’t be surprised if we see the Aussie make a run for the all-time high at 1.1000 and beyond!