Yesterday the Reserve Bank of Australia (RBA) met for the May Official Cash Rate (OCR) decision. Leading up to the decision the ASX were pricing a rate cut expectation as a 76% possibility as at the 4th of May and we had seen the Australian Dollar (AUD) steadily declining against the Majors (GBP, EUR, USD & NZD).
The decision was made for the OCR to be cut from 2.25% to 2.0%. The expected normal market reaction to a cut would see the Australian Dollar weaken immediately following such a statement, however after an initial sell-off of about 0.5% the ‘Aussie’ rallied between 0.8% -1% against a basket of currencies. The Australian Dollar to US Dollar Exchange Rate (AUD/USD) making it to a high of 79.18 US Cents during the local session. The AUD/GBP exchange rate reached 0.5236, the AUD/EUR gaining a full 1% to 0.7108 and the AUD/NZD almost making it over 1.05 at a high of 1.0498.
In the accompanying statement made by Governor Glenn Stevens’s reference was made to the rise in housing in Sydney however the Board made reference to working with regulators to contain these risks due to the lowering of the cash rate. The official stance is still that the Australian Dollar requires ‘further depreciation’ Governor Stevens mentioned that this is both ‘likely and necessary, particularly given the decline in key commodity prices.’
Surprisingly the ‘Aussie’ continued to make gains even during the offshore session gaining further against the US Dollar to an overnight high of 79.56 US Cents, after the release of disappointing US data in the form of Trade balance and Non-Manufacturing PMI, both falling below the expectation and the previous months results causing investors to doubt the timeframe for the potential future rate rise in the US.
Samson Capital Advisors LLC principal Jonathan Lewis told Reuters, ‘Evidence is beginning to build, with these last couple of days of numbers that suggest a weaker [US] dollar and suggest a Fed more likely to be on hold.’
The Australian Dollar continued to make gains overnight also against the EURO and the New Zealand Dollar. AUD/EUR rallied to 0.7112 and against the ‘Kiwi’ the Australian Dollar made it to a high of 1.0533.
Economists are speculating that the rally in the Australian Dollar against all currencies after the RBA rate reduction is a change to the wording by Governor Stevens for any further possibility to rate cuts for the Australian economy.
The market will now look to the end of the week for the UK election for confirmation of the election results and the possibly of volatility to the Australian Dollar to Pound Sterling Exchange Rate. The Australian Dollar to Pound Sterling is currently trading at 0.5227 at 8:45 AM AEST Today.