FX.co ★ Australian dollar: one step forward, two steps back

The Australian dollar dropped from its highs after this week's Reserve Bank of Australia (RBA) meeting. The aussie failed to consolidate its gains, although the currency may recover soon

The Australian dollar dropped from its highs after this week's Reserve Bank of Australia (RBA) meeting. The aussie failed to consolidate its gains, although the currency may recover soon.

On Thursday, February 3, the Australian dollar sank considerably amid investors' risk aversion. Earlier, experts drew attention to the intensification of risk appetite, which slipped the aussie. According to experts, the explosion of risk sentiment in the market caused a dissonance between the strength of the Australian dollar and a sharp fall in its yield. If the strengthening of risk appetite increases, AUD is likely to sharply fall in value.

Economists estimate that in the future AUD may stay in the existing trading channel. Short-term strengthening of the aussie at the beginning of this week was promoted by profit fixation on short positions among investors. Earlier, before the RBA meeting results were released, experts had fixed the closing of short positions on the Australian dollar. Market participants expected the tapering of the bond buying program and the first steps to raise interest rates in Australia. According to preliminary estimates, a U-turn in the RBA monetary policy was expected in Q3 of 2022.

Earlier this week, the Australian regulator surprised the markets. It kept the interest rate at 0.1% and said it was ready to reduce the bond-buying program by 4 billion AUD weekly. However, the termination of the QE program does not mean an early increase in rates, the RBA noted.

However, the market participants, who were expecting hawkish actions from the regulator, were unpleasantly surprised by the RBA's dovish decision. The board emphasized that the halt in quantitative easing did not imply a near-term hike in interest rates as it was still prepared to be patient. The regulator plans to monitor the current economic situation and the unwinding of the inflationary spiral. The authorities are going to take measures in case of an urgent need. As a result, on Tuesday morning, February 1, AUD was among the outsiders.

The Aussie reached a certain equilibrium, rising against the dollar on Wednesday, February 2. The current RBA meeting was seen by experts as dovish compared to market expectations. Officials at the RBA have argued that inflation is likely to fall below 3% in 2022 and that the 2% target is just around the corner. The bank believes that the inflation rate is related to rising gasoline prices and disruptions in global supply chains. The RBA pointed to wage growth, which is slowly returning to pre-pandemic levels. Going forward, the regulator expects wage growth to accelerate as labor market conditions tighten.

The uncertainty over the early rise in interest rates significantly hurt the aussie. As a result, further strengthening of AUD was questioned. The tense situation collapsed the AUD/USD pair from the highs of late December 2021 to lows near 0.7000. On Thursday, February 3, AUD increased by 0.14% to 0.7136. Later, the AUD/USD pair slipped slightly towards 0.7125.

In the short term, the Australian dollar will be closely correlated with risk appetites in the markets. According to economists, the AUD/USD pair should rise to the area of 0.7200-0.7250 to make a reverse.

According to analysts, the correlation of the AUD/USD pair with the risk appetite in the markets and the unexpected dovish decision of the RBA may push the pair upwards. In the near future the fall of the Australian dollar is likely to stop. In this case, many investors in AUD believe that sooner or later the RBA will follow the path of the Fed and other global regulators.