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The Australian dollar jumps after the market lowers the odds of a November interest rate cut.
The Reserve Bank of Australia's (RBA) September decision was as expected: no change to the base rate which stays at 3.6%.
However, the guidance was always going to be interesting owing to the conflicting signals coming from the economy this month: on one hand, we received a surprisingly weak employment report, on the other, a surprisingly strong CPI inflation indicator.
This means the RBA's guidance today will carry more weight than usual as investors seek a guide on the outlook for Aussie monetary policy.
The RBA's statement accompanying the decision makes clear that it is appropriate to remain cautious.
The statement seemed to show that concerns about the inflationary outlook outweigh the poor labour market data. It flagged concerns over a slower decline in underlying inflation and stronger domestic data.
"The RBA's hawkish hold reinforces our bullish view on AUD," says Francesco Pesole, FX Strategist at ING Bank N.V.
Above: AUD performance screened over one week.
Australia's 3-year AGB yield rose +6bp to 3.60%, taking it to the highest since May. Given this rise in yields, it's little wonder then that the Aussie is on the march:
The Australian-U.S. Dollar exchange rate is higher by 0.45% at 0.6607, the Euro-Australian dollar rate is lower by 0.20% at 1.7790.
The Pound to Australian dollar exchange rate is down at 2.0357, putting it on a major support line. If the line at 2.0342 breaks, then GBP/AUD could be set to trend lower towards the key 2.0 level.
"We view the rate decision as a hawkish hold. Previous references to further policy easing have been omitted in the policy statement," says Nicholas Chia, FX and Macro Strategist at Standard Chartered. "The optics of further RBA easing are complicated by a salient economic upswing as real wage growth firms up and asset price appreciation induces consumption via the wealth effect."
The RBA indicated the stronger-than-expected data on growth and inflation may indicate that households have become more comfortable consuming as real incomes and wealth rise.
Money markets now assign less than 50% probability of a rate cut in November.
"AUD has been one of our favourite currencies into this RBA meeting, and we think it has some further room to run, also in the crosses against currencies that have unattractive domestic central bank stories," says ING's Pesole.