The Australian dollar has posted sharp losses in response to the RBA policy decision earlier on Tuesday. Currently, AUD/USD is trading at 0.7463, down 0.78% on the day.
RBA abandons yield curve control
The Australian dollar took a tumble after the RBA policy meeting. The markets reacted sharply after the RBA formally abandoned its yield curve control of targeting the April 2024 Australian Commonwealth Government bond at 0.10%. The bank essentially threw in the towel on yield curve control last week, and the yield surged as high as 0.75% last week. The RBA maintained the cash rate at 0.10% for a 12th straight month, and QE purchases of AUD 4 billion/week will be kept until at least February 2o22.
The RBA’s move means that the bank has become more hawkish (or if you prefer, less dovish), as the yield curve control tool was a key pillar in the bank’s QE programme. The markets, however, were not impressed and the Australian dollar fell sharply. RBA Governor Philip Lowe was somewhat vague on when the RBA would raise rates, saying that the bank would be “patient” and wait until economic conditions were suitable for a rate hike. Lowe has said on numerous occasions that the bank would not raise rates prior to 2024, but the markets have been much more hawkish, given the country’s strong recovery and high inflation. The markets have been aggressive in pricing in a series of rate hikes, with the cash rate projected to rise to around 1.5% by the end of next year. Unless growth and inflation drastically decrease, a strong case can be made for Lowe having to accelerate forward guidance to 2023. If Lowe insists on the 2024 timeline, the Australian dollar could face further headwinds.
The Federal Reserve concludes its policy meeting on Wednesday, with expectations that the Fed will press the taper button while emphasising that no rate hikes are planned. It’s questionable whether a taper has been fully priced in by the markets, even though the Fed has been very transparent about its plans. This means that there is room for the US dollar and US Treasury yields to head to higher ground.
- There is resistance at 0.7563, followed by resistance at 0.7606
- AUD/USD is testing support at 0.7471. Below, we find support at 0.7422
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