Australian Dollar Surges after RBA Maintains Record Low Rate

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At the monetary policy meeting today, the Reserve Bank of Australia decided to kept its official cash rate at 2.50 percent for the tenth time in a row, extending its longest rate pause since 2008. The cash rate has left unchanged since August 2013 when the Board cut the rate by 25 basis points to the record low level. The Reserve Bank of Australia’s rate decision was in line with median projections from Bloomberg News survey. The Bank cited a moderate growth outlook in global economy, a modest surge in domestic consumer demand and a significant decline in resources sector investment spending as main reasons to keep the cash rate on hold. The Bank also said that global interest rates has low possibility to hike over the short term ahead.

The Australian economy accelerated on a seasonally adjusted rate of 1.1 percent in the first quater of 2014, the highest growth in the last seven quarters. Though an economic growth in the March quarter appeared to have been above trend and the labor market showed some improvements in these recent months, monetary policy remains accommodative. Obviously, the policy makers continued to endorse wait-and-see approach to gather more evidence of enhanced conditions to confirm that the economy shifts to a significant expansion stage. “Looking ahead, continued accommodative monetary policy should provide support to demand and help growth to strengthen over time. Inflation is expected to be consistent with the 2–3 per cent target over the next two years”, said Glenn Stevens, Governer of the Reserve Bank of Australia.

The Bank also reiterates in its statement “the exchange rate remains high by historical standards, particularly given the declines in key commodity prices, and hence is offering less assistance than it might in achieving balanced growth in the economy”. Thus, a period of stability in interest rate proved to be appropriate to foster sustained economic growth and keep the inflation within target.

AUDUSD 1-minute Chart: July 01, 2014

1-minute AUDUSD chart: July 1, 2014

In the minutes following the in-line RBA’s rate decision, the Australian dollar immediately gained grounds versus most of other major currencies. As can be seen from the 1-minute chart above, the AUDUSD pair jumped approximately 40 pips from $0.9410 to $0.9450 within five minutes. The Relative Strength Indicator was crossing above a 70-level, indicating that foreign exchange trading crowd was massively buying the aussie while cutting their greenback holdings. At the time this report was written, the aussie was traded at $0.9448.

To contact the reporter of this story: Trang Hien Nguyen at trangnguyen@forexminute.com

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