The Australian currency, which had been eagerly awaiting the regulator's decision, lost its momentum after the session. The Australian dollar slumped markedly following the Reserve Bank of Australia's (RBA) meeting.
On the evening of November 2, following the regulator's decision to maintain the interest rate, the AUD began to fall, losing 0.81%. As a reminder, the RBA has left its key rate at a record low of 0.10% at the end of this year. At the same time, the regulator does not guarantee support for government bond yields. The RBA also does not rule out a rate hike before 2024.
The dovish rhetoric of Australia's central bank has confused the markets. Many traders and investors are surprised by the results as they had expected hawkish statements from the RBA. The biggest disappointment was that the regulator, despite aggressive market sentiment, intends to wait until February 2022 to see whether the high rate of quantitative easing should be reduced. Currently it is A$4 billion a week. Analysts believe these rates are softer than those of the RBNZ or the Bank of Canada.
Against this background, ING experts have concluded that the current policy of the Australian regulator is more sensible, despite its dovish tinge. "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," ING analysts said
So far, Australia's central bank did not display the hawkish pivot markets were expecting. As a result, the Australian dollar plunged 0.7% to 0.7462, the lowest since October 22, 2021. On the morning of November 3, the AUD/USD pair was trading near 0.7443, trying to gain some ground. It continues to correct, having fallen from a multi-month high of 0.7550 reached last week.
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. However, the lack of any changes to the QE programme has not prevented the RBA from giving hope to the markets. The regulator has signaled that a tightening of monetary policy is possible in the medium or long term. Australia's central bank governors believe that conditions for a key rate hike may be shaping up sooner than expected. Such criteria include full employment and sustained inflation of 2%-3%. In such a situation, the regulator would be able to reconsider previous decisions. Currently, Australia's core consumer price inflation is 2.1% year-on-year.
Additional support for the AUD/USD is provided by the continued weakening of the US currency. At the moment the greenback is regaining balance ahead of the Fed meeting. The current strengthening of the USD is contributing to the downside of the Aussie. It despite the downtrend, is seeking to overcome its pull. The AUD/USD has the potential to rise above 0.7500.