Forex Market: AUD/USD pares earlier losses, RBA delivers smaller-than-expected rate hike

The Aussie Dollar pared earlier losses against its US counterpart on Tuesday, which it recorded after the Reserve Bank of Australia surprised market players with a smaller-than-anticipated interest rate hike.

The RBA raised its cash rate by 25 basis points to 2.60% at its October policy meeting earlier on Tuesday, while confounding market expectations of a 50 basis point hike.

The central bank had delivered a 50 basis point rate hike in each of the previous four months and a 25 basis point hike in May.

The RBA said it decided to slow the tightening pace, since the cash rate had been raised substantially in a short period of time.

Still, the central bank left the door open to further tightening, as inflation in Australia remains too high. RBA policy makers once again said the size and timing of future rate hikes would be guided by the incoming data.

“Obviously the RBA hasn’t been persuaded by what other central banks are doing, which does make the comment that they don’t have any concerns about the exchange rate down here,” Ray Attrill, head of Forex strategy at National Australia Bank, was quoted as saying by Reuters.

“There’s no evidence yet that other central banks are about to step down the aggression with which they are tightening policy, (so) I think it makes sense for Aussie to be below 65 for the time being.”

The RBA projects CPI inflation to be around 7.75% this year, a bit above 4% in 2023 and around 3% in 2024.

As of 8:34 GMT on Tuesday AUD/USD was edging down 0.17% to trade at 0.6504. Last week, the major Forex pair went down as low as 0.6363, which has been its weakest level since April 24th 2020 (0.6337).

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 -89.8 basis points (-0.898%) as of 8:15 GMT on Tuesday, down from -80.8 basis points on October 3rd.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 0.6479
R1 – 0.6558
R2 – 0.6601
R3 – 0.6681
R4 – 0.6760

S1 – 0.6436
S2 – 0.6357
S3 – 0.6313
S4 – 0.6270