Forex: What Does the RBA Rate Cut Mean for the Aussie Dollar?

High beta currencies are up on the day, led by the Australian Dollar, despite the fact that the Reserve Bank of Australia cut its key interest rate last night, continuing what has been a relentless dovish policy implementation over the past year. If rate cuts are theoretically bearish, why is the Aussie up then?

This column typically focuses on events occurring in Europe but today my interest is piqued by price action that the Australian Dollar has exhibited in the wake of the Reserve Bank of Australia cutting its key interest rate, from 3.00% to 3.25%, at its final meeting of 2012. While the AUDUSD fell towards 1.0400, it quickly recovered and is sitting a few dozen pips from 1.0500, undermining the longstanding notion that rate cuts produce weaker currencies, while rate hikes produce stronger currencies.

Mainly, the one hitch to this rule is that if an event is “priced in,” then it will not yield the expected outcome – the asset’s price as already adjusted. Taking a look at the Credit Suisse Overnight Index Swaps, there was a 92% chance of a 25-basis point cut – a near “certainty” for traders positioning themselves ahead of the announcement. Thus, today’s price action is fairly typical – the AUD/USD is not rallying on the rate cut itself, but the shifting of expectations from a declining rate environment to a stable one, at least for the next few months. It’s also worth exploring some parallels between prior RBA Rate Decisions with this one.

Like last December, the RBA has again cut its key rate ahead of the January recess. Like this June (ruling out September as there was no expectation for a rate cut, the RBA has made a significant move ahead of a key string of data: 3Q’12 GDP on Wednesday; November labor market data on Thursday; and October trade data on Friday. Here’s the striking difference that piqued my initial interest: the RBA was expected to cut in June, just like today, ahead of its key stretch of data, but it did not, and 1Q’12 GDP and May labor market data outperformed forecasts by miles each. Instead, this RBA chose to cut its rate in line with heavy expectations. As mentioned earlier, the cut could be attributed to preemptive policy action amid the January holiday; or it could mean that the data due in the coming days is unlikely to outperform.

Taking a look at European credit, peripheral bond yields are mixed. The Italian 2-year note yield has decreased to 1.880% (-0.1-bps) while the Spanish 2-year note yield has increased to 2.783% (+3.4-bps). Similarly, the Italian 10-year note yield has decreased to 4.404% (-3.1-bps) while the Spanish 10-year note yield has increased to 5.222% (+0.6-bps); higher yields imply lower prices.


AUD: +0.52%
NZD: +0.45%
JPY: +0.32%
EUR: +0.22%
GBP: +0.20%
CAD: +0.11%
CHF: -0.15%

Dow Jones FXCM Dollar Index

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