Aussie drops as RBA sounds dovish tone in busy cenbank week

LONDON (Reuters) – 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.

FILE PHOTO: An Australia dollar note is seen in this illustration photo June 1, 2017. REUTERS/Thomas White/Illustration

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 dollar down as much as 0.7% to $0.7462, 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.

“There is still clearly a gap between AUD and Aussie rates, with the former that saw a relatively small jump as rates sold off last week and now seems to be over-discounting the post-RBA correction in yields,” they said, adding that the short-term risk for the Aussie “skewed to the upside”.

New Zealand’s dollar also dropped, losing 0.2% to $0.7174.

The same inflation dilemma hangs over other central banks and kept currency markets largely treading water as they waited to see whether policymakers were ready to dial back stimulus.

“We expect the (Federal Open Market Committee) to state that the Fed is ready to act decisively if inflation is not moving towards target levels when tapering ends, but it still expects inflation to fall as supply constraints ease. We think investors will see this as advancing the likely timing of Fed rate hikes,” said Standard Chartered’s head of G10 FX, Steve Englander.

The dollar index traded flat at 93.918, nursing a 0.25% loss from Monday when it retreated from a 2 1/2-week high of 94.313.

The euro edged 0.1% lower to $1.1596.

Sterling was on the back foot, slipping 0.1% to $1.3651.

The dollar weakened 0.3% to 113.62 yen, continuing to consolidate below an almost four-year peak of 114.695 reached on Oct. 20.

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