Forex Market: AUD/USD rebounds from an 18 1/2-month low, RBA keeps rates, discontinues bond purchases

AUD/USD extended a rebound from recent 18 1/2-month trough on Tuesday despite a dovish policy outlook by the Reserve Bank of Australia as risk sentiment improved worldwide.

The RBA kept its official cash rate intact at a record low level of 0.10% for the 14th consecutive month during its policy meeting earlier on Tuesday, in line with market expectations.

The central bank also discontinued its AUD 275 billion bond-purchasing program, with the final purchases to be conducted on February 10th.

Still, RBA policy makers noted that the halt in quantitative easing did not suggest an interest rate hike in the near term, while the bank’s Board would remain patient on policy.

“As the board has stated previously, it will not increase the cash rate until actual inflation is within the 2 to 3% target range. While inflation has picked up, it is too early to conclude that it is sustainably within the target band,” the RBA said.

The Board also noted that wages growth was still modest and it would likely take some time before it is at a rate consistent with inflation being at target.

“It was a clearly dovish message. The Governor has certainly gone out of his way to dissuade pricing for a hike in the first half of the year,” Westpac analyst Damien McColough was quoted as saying by Reuters.

Westpac expects a rate hike to occur in August given strength in inflation and employment.

“Our August meeting expectation appears well placed. So while yields at the front end and out to 3-years will be lower, they will only be marginally so and we remain better sellers into strength, despite the RBA message,” Westpac’s McColough said.

Despite RBA’s dovish outlook, markets are still pricing a rate hike to 0.25% in May and another four increases to 1.25% by the end of 2022.

As of 9:25 GMT on Tuesday AUD/USD was edging up 0.31% to trade at 0.7088, while moving within a daily range of 0.7033-0.7093. Last Friday the major Forex pair slipped as low as 0.6967, which has been its weakest level since July 17th 2020 (0.6967).

Bond Yield Spread

The spread between 2-year Australian and 2-year US bond yields, which reflects the flow of funds in a short term, equaled -26.41 basis points (-0.2641%) as of 9:15 GMT on Tuesday, down from -25.7 basis points on January 31st.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 0.7043
R1 – 0.7099
R2 – 0.7133
R3 – 0.7189
R4 – 0.7245

S1 – 0.7010
S2 – 0.6954
S3 – 0.6920
S4 – 0.6887