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Australian Dollar Leaps as RBA Stands Firm on Interest Rates

The RBA left interest rates on hold at 1.5 percent on Tuesday, spurring big gains for the Australian dollar, which had slipped beforehand to long-term lows against several major currencies. Roughly half of economists had expected rates to be cut by 25 basis points.

Posted May 07, 2019

An RBA-induced currency spike had the Australian dollar buying US70.5¢ on Tuesday — nearly a cent more than Monday’s 4-month low of US69.6¢.

It had been a tough start to the week for the Aussie following a breakdown in trade talks between the US and China. For much of the past year, the Australian dollar has been sensitive to Chinese economic matters, and this weekend was no different, as it opened on Sunday night much weaker than its closing levels from Friday.

For Australian dollar bulls, thank goodness, then, that the Reserve Bank of Australia has seen fit to trample on market expectations for an imminent interest-rate cut — expectations that were stoked by a recent data release showing core inflation at a record low.

The RBA not only left interest rates unchanged on Tuesday at 1.5 percent, but it appeared to fasten the outlook for monetary policy to Australia’s labour market, which policymakers insist remains “strong.”

“The strong employment growth over the past year or so has led to some pick-up in wages growth, which is a welcome development,” the RBA’s statement reads.

In its concluding remarks, the RBA said it would be “paying close attention to developments in the labour market at its upcoming meetings.”

The implication here, according to economists, is that any increase in Australia’s unemployment rate above projected levels will see a policy response. Per the RBA, unemployment is expected to remain “steady” at levels near 5 percent but will decline to 4.75 percent by 2021.

For the Australian dollar as a whole, this may benefit in the coming months from what appears to be a relatively hawkish RBA. Although interest rates are still expected to be cut later in the year (many now suspect a cut in September), this gives ample time for other central banks to present their own cases for rate cuts, which may reduce much of the policy-based incentives for selling Aussie dollars.

Having said that, against the US dollar, the Australian dollar is expected to be worth between 3.5 and 6.5 percent less by year-end. HSBC is among the most bearish, with a 2019 forecast for AUD/USD of 66¢.

Tuesday’s central bank developments should have been a big boost for AUD/INR, which is expected to rise in the coming months, but the shine has been taken off somewhat by a grim set of Australian retail sales figures and the aforementioned developments on US-China trade, both coming in the past 36 hours.

Other interesting AUD exchange rates include AUD/GBP, which opened on Sunday night at its lowest level in nearly 3 years, at £0.53. After 2 strong days, the Aussie is now worth seven-tenths of a penny more at £0.537, but is nearly 3 percent below this year’s average rate of £0.552.

Please note that the opinions of our authors are their own and do not reflect the opinion of Best Exchange Rates and should not be taken as a reference to buy or sell any financial product.