The Australian Dollar Sails South as RBA and Federal Reserve Take Different Monetary Policies.
Last week, the Australian Dollar (AUD) experienced a significant downturn in value as the Reserve Bank of Australia (RBA) and the Federal Reserve took different monetary policy paths. The RBA raised rates by 25 basis points as anticipated but surprised markets in the post-match press conference when Governor Philip Lowe made a statement that shifted the AUD to a bearish direction. The statement suggested markets should not expect a rate hike at the upcoming March and April meetings as previously anticipated.
This saw the Australian Dollar close below 0.66c for the first time since November, reaching a 4-month low of 0.6564 against the USD, with over a 2% sell-off on Tuesday even after the RBA raised interest rates in Australia for the 10th month in a row.
Between September 2022, and November 2022 we saw the AUD/USD exchange rate trade between 0.62-0.66c however before this it was last at these levels in May 2020 coming out of the COVID collapse.
Monetary Policy
The RBA’s decision to raise rates was a widely expected move. However, it was Governor Philip Lowe’s comments that caused the AUD to weaken. This led to a significant shift in the market's sentiment, causing the AUD to take a bearish direction.
While the RBA took a dovish turn, the Federal Reserve gave a clear indication of its intentions to reduce inflation towards its 2% target. During his testimony in Washington, Fed Chair Jerome Powell made it clear that the Fed is determined to get inflation down toward the 2% target. This led to the market pricing of the terminal rate being higher, causing the US Dollar to rise.
After the big down day on Tuesday, the currency has barely moved from Wednesday to Friday, closing the day under 0.1% each day, and looking back this is a very key level of support and resistance, so next week will be very important to see which ways it moves.
The week ahead sees a lot of high-tier data releases with US inflation, retail sales & consumer sentiment data released throughout the week, and locally we will see the consumer confidence and employment figures released, meaning more opportunity for further volatility.