Release Explanation: The interest rate sets the tone for mortgages, commercial loans, and all economic lending criteria. “This is the single most important reason why currencies are bought and sold. A strong interest rate and robust business cycle will attract foreign investment” Trade Team said. “A weak interest rate will normally lead to a weak currency as investors swap the higher yielding currency for a profit,” they added. Trade Desk Thoughts: The Bank of Australia decided to keep rates on hold, after their last interest rate meeting held at the beginning of April where they reduced the interest rate by 25 basis points in an unexpected move.

RBA Governor Stevens has stated that the world economy appears to still be very weak even though the credit markets have improved over the last few months. Demand has not weakened as much as in other countries and the economy remains strong while inflation is likely to decline over time. By historical standards, markets and mortgage rates are at very low levels; this combined with the substantial fiscal initiatives from the Government should provide support to domestic demand over the coming period.

“The decision to keep the interest rate on hold suggests that the RBA members are considering that the economy will return to a growth phase in the second part of the year. Until now, the Australian economy was the least affected by the credit crisis, having the biggest growth forecast,” Trade Team said.

Forex Technical Reaction: The Australian dollar has strengthened significantly immediately after the RBA announcement. The pair gained 30 pips, retracing every pip lost during the Asian session