Forex Market: AUD/USD retreats as RBA scraps bond yield target, signals earlier rate hike

AUD/USD retreated over 0.7% on Tuesday after the Reserve Bank of Australia dropped the 0.10% yield target on April 2024 government bond at its policy meeting earlier today. The RBA also omitted its previous projection that interest rates were not likely to be raised until 2024, indicating a possible earlier rate hike.

The central bank continued with its plan to maintain its bond-purchasing program at a pace of AUD 4 billion per week until at least mid-February 2022.

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.

RBA policy makers noted that the decision to drop the yield target reflected the economic improvement and the earlier-than-anticipated progress over the inflation objective.

“The board is prepared to be patient, with the central forecast being for underlying inflation to be no higher than 2 1/2% at the end of 2023 and for only a gradual increase in wages growth,” RBA Governor Philip Lowe said in a statement.

On the other hand, Lowe also noted the most recent macro data and forecasts did not warrant a rate hike next year.

“The market was pricing way more,” GSFM investment strategist Stephen Miller was quoted as saying by Reuters.

“It’s the minimum possible removal of monetary accommodation in the wake of last week’s inflation numbers. It’s not an abrupt change tack from the RBA at all.”

As of 9:46 GMT on Tuesday AUD/USD was losing 0.71% to trade at 0.7465, after earlier touching an intraday low of 0.7460. The latter has been the Forex pair’s weakest level since October 22nd (0.7454). The major currency pair appreciated 4.03% in October, while marking its best monthly performance since December 2020.

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 4.24 basis points (0.0424%) as of 9:15 GMT on Tuesday, down from 5.7 basis points on November 1st.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 0.7513
R1 – 0.7541
R2 – 0.7563
R3 – 0.7591
R4 – 0.7618

S1 – 0.7491
S2 – 0.7463
S3 – 0.7441
S4 – 0.7418