Aussie resumes downturn

The Australian dollar has posted sharp losses and has dipped below the 0.74 level. Currently, AUD/USD is trading at 0.7387, down 0.80% on the day. The currency has started the month of November on a sour note, falling 1.7%.

After taking a tumble after the RBA policy meeting earlier this week, the Australian dollar has resumed its losing ways and dropped to its lowest level since October 18^th. The markets were not impressed with the disorderly retreat which saw the RBA abandon its yield curve control, a key tool in its QE programme. The Australian dollar took it on the chin after the meeting, and fell 1.2%, its worst one-day performance since May.

The RBA will again be in focus again on Friday, with the release of the quarterly Monetary Policy Statement. The statements are usually tame affairs which have little impact on the currency markets, but with the volatility that the Aussie has had this week due to the RBA, we could see a reaction from the Australian dollar on Friday.

We continue to see a disconnect between market expectations and RBA guidance. RBA Governor Lowe has said on numerous occasions that the bank would not raise rates prior to 2024, but the markets have been much more hawkish, given the country’s strong recovery and high inflation. The markets have been aggressive in pricing in a series of rate hikes, with the cash rate projected to rise to around 1.5% by the end of next year. Unless growth and inflation drastically decrease, a strong case can be made for Lowe having to accelerate forward guidance to 2023. Such a move would likely put upward pressure on the Australian dollar.

As was widely expected, the Fed tapered its bond purchase programme by 15 billion dollars/mth. This move had been well-telegraphed, although there was a question as to how large the taper would be. Fed Chair Powell said the central bank would be “patient” with regard to rate hikes, stating that now was not the time to raise rates since the labour market needed to improve. Powell added that the Fed expected to wind up tapering in mid-2022, but the process could be accelerated or slowed down depending on the economy.

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