The Australian dollar gained over 1 percent against the U.S. dollar on Tuesday — heading for its biggest daily rise in more than two weeks — after the Reserve Bank of Australia surprised many investors by refraining from an interest rate cut.
The Aussie rose to $0.7711, its highest in a week, from around $0.76 before the decision, extending its recovery from a six-year trough of $0.7534 set on Thursday. It was last trading at $0.7685, up 1.2 percent on the day.
A fall in iron ore prices, Australia’s single biggest export earner, and a currency that is still seen to be above fair value, had left many convinced that the RBA would reduce rates either this month or next.
The RBA policy board noted that while the Aussie had fallen against a strong greenback, the decline against a basket of currencies had been less and a lower exchange rate was needed to help the economy.
“Should the Aussie appreciate notably today or over the next few days we would have to come to the conclusion that the market has misunderstood the RBA’s intention (in refraining from cutting),” said Ulrich Leuchtmann, currency strategist at Commerzbank. “In that case this would offer entry levels for shorts in the Australian dollar in the medium term.”
The U.S. dollar, meanwhile, recovered almost all losses sustained after a weaker-than-expected jobs report, tailing higher Treasury yields. The index rose to 97.528 , recovering from Monday’s low of 96.329, with the dent from the soft payroll data on Friday proving to be temporary.
“All of this speaks of a market that has been unconvinced about mid-year Fed rate hikes all along, yet still expects the U.S. economy to outperform its major competitors,” said Kit Juckes, currency strategist at Societe Generale, adding that the Fed would raise rates sometime in the future.