Forex Market: AUD/USD extends gains as RBA keeps rates intact, sticks with bond tapering plans

AUD/USD extended gains on Tuesday after the Reserve Bank of Australia surprised markets with its decision to stick with bond purchase tapering plans.

At the same time, the RBA official cash rate was kept intact at a record low level of 0.10% during the bank’s policy meeting earlier on Tuesday, in line with market expectations.

The central bank said it would reduce the weekly pace of bond purchases to AUD 4 billion from September to at least mid-November, from AUD 5 billion per week currently.

Many analysts had expected the RBA to delay bond tapering, since lockdown restrictions in major cities will probably lead to a steep GDP contraction during the current quarter.

The central bank indeed acknowledged that economic outlook for the upcoming months looked uncertain and depended on the health situation and the restrictive measures. Yet, the RBA argued that Australia’s economy would rebound quickly once lockdown restrictions are eased.

The RBA said it now expected Australian economy to expand by 4% in 2022, up from a prior forecast of 3.5%, and by 2.5% in 2023.

As for Australia’s unemployment rate, the bank now projects a drop to 4% by the end of 2023.

“The RBA’s decision to not delay the tapering of its asset purchases is a hawkish signal and consistent with our view that the Bank will hike rates in early-2023,” Marcel Thieliant, a senior Australia economist at Capital Economics, was quoted as saying by Reuters.

“We reiterate our long-held view that the Bank will end its asset purchases in the middle of next year,” Thieliant added.

Additionally, the central bank’s three-year bond yield target was left without change at 0.10% on the April 2024 bond.

As of 8:25 GMT on Tuesday AUD/USD was edging up 0.45% to trade at 0.7391, while moving within a daily range of 0.7357-0.7408. The major currency pair has risen 0.65% so far in August, following a 2.07% drop in July.

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 -15.21 basis points (-0.1521%) as of 8:15 GMT on Tuesday, down from -14.8 basis points on August 2nd.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 0.7356
R1 – 0.7384
R2 – 0.7410
R3 – 0.7437
R4 – 0.7464

S1 – 0.7331
S2 – 0.7303
S3 – 0.7278
S4 – 0.7252