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Australian Dollar Soars Despite Interest Rate Cut from RBA

November 3, 2020 at 20:06 by Vladimir Vyun

A set of AUD100 and AUD50 banknotesThe Australian dollar was the strongest currency on the Forex market today even though the Reserve Bank of Australia expanded its stimulus more than was expected. Market analysts explained the currency’s stellar performance by the risk-positive market sentiment and the sell-off of the US dollar.

While markets were expecting an interest cut from the RBA, the central bank was still able to provide a surprise, announcing a whole slew of stimulating measures, namely:

-a reduction in the cash rate target to 0.1 per cent

-a reduction in the target for the yield on the 3-year Australian Government bond to around 0.1 per cent

-a reduction in the interest rate on new drawings under the Term Funding Facility to 0.1 per cent

-a reduction in the interest rate on Exchange Settlement balances to zero

-the purchase of $100 billion of government bonds of maturities of around 5 to 10 years over the next six months.

Regarding the recent economic developments, the bank made positive comments:

Encouragingly, the recent economic data have been a bit better than expected and the near-term outlook is better than it was three months ago.

Yet it was not extremely optimistic:

Even so, the recovery is still expected to be bumpy and drawn out and the outlook remains dependent on successful containment of the virus.

As for plans for the monetary policy for the future, the RBA signaled that it does not expect any interest rate hikes in the foreseeable future:

Given the outlook, the Board is not expecting to increase the cash rate for at least three years.

While analysts do not think that the central bank will cut rates into the negative territory, they expect that it can increase the size of its asset-purchase program. Indeed, the bank said:

The Board will keep the size of the bond purchase program under review, particularly in light of the evolving outlook for jobs and inflation. The Board is prepared to do more if necessary.

AUD/USD climbed from 0.7054 to 0.7140 as of 20:05 GMT today. EUR/AUD fell from 1.6493 to 1.6390. AUD/CAD rallied from 0.9325 to 0.9403.

If you have any questions, comments, or opinions regarding the Australian Dollar, feel free to post them using the commentary form below.

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