Australian Dollar Falls as Dovishness Creeps Into RBA Commentary

What happened

The Reserve Bank of Australia raised its official cash rate to 4.85% from 4.60%, an 18-year high. The board voted six to three for the move. The Australian dollar initially rose above 70.00 U.S. cents, then fell to around 69.75 U.S. cents.

Confirmed

Global impact / market context

The split vote signals less support for further rate rises, which means the cash return on holding Australian dollars may stop climbing. That can push investors to sell the currency, especially those holding large amounts, and lower bond yields reduce the appeal of Australian fixed-income assets.

Analyst inference

Real money investors, which means long-term funds rather than fast traders, had held a very large position in the Australian dollar and have started selling. Any doubt about the future rate path makes the currency vulnerable, while the 10-year government bond yield fell to around 5.10% from 5.16%.

Analyst inference

What to watch

1. The RBA appeared to remove its tightening bias, which rules out a further interest rate rise in December, according to George Tharenou, chief economist. Confirmed
2. Watch whether real money investors keep selling the Australian dollar from their extreme overweight position, which means holdings above their usual benchmark weight, since further selling could add downward pressure. Analyst inference
3. Watch slowing output growth, which the bank appears more focused on, as a possible trigger to disinflation, meaning slower price rises, which could shape the future rate path. Analyst inference

Evidence

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