AUD/USD further pulls back from 4-month high after RBA Minutes, China LPR cut

Key points

AUD/USD extended losses from the prior trading day on Tuesday, retreating almost 0.6%, after the Reserve Bank of Australia noted in its June policy meeting minutes that the decision to hike rates by 25 basis points was “finely balanced”.

This seemed to have eased concerns that another rate increase was imminent.

RBA also said further rate hikes would depend on how dynamics locally and abroad affect the inflation outlook.

Yet, RBA policy makers noted recent macro data indicated inflation risks in Australia had shifted “somewhat to the upside”. The RBA Board once again stressed on their commitment to do whatever was necessary to bring inflation back down to the 2%-3% target range over a reasonable period of time.

“… we still expect the RBA to raise rates two more times to 4.6%, having penciled in increases in July and August,” Tapas Strickland, head of market economics at NAB, was quoted as saying by Reuters.

The Reserve Bank of Australia has already delivered a total of 400 basis points of interest rate hikes since May 2022, while bringing its cash rate to 4.10% – the highest level since April 2012.

Meanwhile, China reduced on Tuesday its 1-year and 5-year loan prime rates by 10 basis points, which has been the first such move in 10 months. However, markets were expecting larger support to economic recovery in the form of a bigger LPR cut.

Beijing’s decision dragged down the Chinese yuan and the Aussie dollar, which is frequently used as a liquid proxy for the yuan.

As of 7:34 GMT on Tuesday AUD/USD was losing 0.58% to trade at 0.6810. Last Friday the major Forex pair went up as high as 0.6899. The latter has been its strongest level since February 21st (0.6920).

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 -58.0 basis points as of 5:15 GMT on Tuesday, down from -52.7 basis points on June 19th.