Aussie drops as RBA sounds dovish tone in busy cenbank week

Australia’s dollar fell on Tuesday after the Reserve Bank of Australia sounded a more dovish tone than expected, in the first of several meetings of central banks this week

Attention now turns to the Federal Reserve, which kicks off its two-day meeting on Tuesday and is expected to announce the start of tapering its asset purchases. Markets are also pricing in an interest rate rise at the Bank of England meeting on Thursday

Investors in recent weeks have priced in a wave of tightening from central banks as they bet policymakers are sufficiently concerned about rising inflation to end pandemic-era levels of easing

Australia’s central bank did not display that hawkish pivot many had expected, sending the Aussie dollr down as much as 0.8% to $0.7457, its weakest since Oct. 22

The RBA stressed that inflation was still too low, although it also omitted its previous projection that rates were unlikely to rise until 2024 and dropped a key target for the April 2024 government bond

Analysts said the message was still more hawkish than previous RBA meetings, even if not as hawkish as markets had anticipated

“Unlike other central banks (like the ECB recently), the RBA’s message was successful in at least marginally scaling down hawkish bets, although markets are still pricing in 76bp (basis points) of tightening in the next 12 months,” said ING analysts in a research note

They said there was a gap between the performance of the currency and interest rates, with last week’s jump in the dollar comparatively small when interest rates rose, and the currency now “over-discounting the post-RBA correction in yields”

They said there was a gap between the performance of the currency and interest rates, with last week’s jump in the dollar comparatively small when interest rates rose, and the currency now “over-discounting the post-RBA correction in yields”

The short-term risk for the Aussie “skewed to the upside”, they added

New Zealand’s dollar also dropped sharply, losing 0.8% to $0.7130, a two-week low

Currency markets elsewhere largely treaded water as they waited to see whether policymakers were ready to dial back stimulus