The Australian dollar enjoys a substantial yield advantage over all its most liquid counterparts. And, while some may consider this fact sufficient to keep bidding the currency higher; the market itself seems to have already priced in this relatively high-level return and now tracks rate expectations more closely. This is the fundamental reality we come to following the release of the RBA's decision to hold the benchmark lending rate unchanged at 4.75 percent this morning.

Heading into this policy verdict, the consensus was uniformly supportive of just such an outcome. In fact, every one of the economists polled by Bloomberg for the event predicted no change and overnight index swaps showed the market had priced in no change from this particular meeting. That said, confirmation of a non-event is certainly not market-moving. On the other hand, the outlook is ever-evolving; and speculation is still driven by commentary that is considered to be a guide as to which direction policy officials are leaning for their future gathers.

Distilling the RBA statement that accompanied the rate decision itself, there is little doubt that the balance shifted more to a neutral stance for the short to medium-term outlook. This would have been uneventful if the markets were not showing a mild hawkish bias heading into the decision. With the acceleration in the TD Securities inflation report for this past month hitting a 3.6 percent annual clip and concerns about global food inflation permeating every major economy; it is natural that there would be some degree of speculation for a hike.

On the other hand, the forecast for rates has eased significantly over the past six months. In fact, as we can see in the differential between the RBA and Fed 12-month yield outlook (seen below), the two forecasts are about even in pricing in approximately 30 basis points of hikes over the period. This has left us with a considerable divergence between spot performance on AUDUSD and yield potential. For reference, the GBPUSD and EURUSD equivalents are still showing a remarkable correlation. Eventually, this discrepancy can wear on the otherwise strong currency.


In the meantime, highlights from the RBA's most recent survey give us little reason to predict a hike or cut through at least the coming quarter. Most notable was the suggestion that the RBA considered a mildly restrictive policy as appropriate. Furthermore, on inflation, the group said the one-year forecast was consistent with target; and that an appreciating currency more than offset the effects of inflation. On economic activity, the RBA projected further growth in employment, though the pace was going to slow. Wages were growing strongly and private investment was rising. On the other hand, the effects of the recent natural disasters (floods and cyclone) have curbed output while household leverage growth has slowed.

AUDUSD Daily Chart


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AUDUSD 120 Minute Chart


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AUDUSD 120 Minute Chart


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Written by: John Kicklighter, Currency Strategist for

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