Australian dollar jumps 1 percent after shift in tone from RBA

The Australian dollar gained 1 percent against its U.S. counterpart on Tuesday after the Reserve Bank of Australia kept interest rates on hold and appeared to raise the bar on further monetary easing.

The Aussie AUD=D4 shot up to $0.7443, its highest since May 6, and climbed nearly 1 percent against the yen, euro and the New Zealand dollar. The RBA kept the cash rate at a record low 1.75 percent at its monthly review, after cutting last month for the first time in a year.

While that was expected, many traders were disappointed that the statement did not give an explicit easing bias, resulting in unfavorable bets being unwound and the spot rate being squeezed higher.

“The RBA doesn’t appear to be in a rush to cut rates further, leading to a short squeeze in the Australian dollar” said Niels Christensen, FX strategist at Nordea.

The U.S. dollar was subdued, trading not far from four-week lows against a basket of currencies, after Federal Reserve Chair Janet Yellen walked a fine line and did not specify whether the Fed will raise rates over the summer months.

The dollar index was flat at 93.891 .DXY, within sight of Monday’s low of 93.745, its weakest since May 11. It had come under pressure since the U.S. nonfarm payrolls report on Friday showed the slowest job growth in more than five years in May, quashing expectations for a near-term rate hikes.

While Yellen remained relatively optimistic about the overall U.S. outlook and said the Fed would hike rates, she gave no fresh hints about the timing of its next move and called last month’s U.S. jobs data “disappointing.”

She also echoed other Fed officials in saying that the UK referendum this month on whether to stay in the European Union would be a factor in the Fed’s decision making. She said a vote for Brexit could have a significant economic impact.

“She was upbeat, but compared to her speech on May 27, when she said a move would be appropriate ‘in coming months,’ she wasn’t specific about timing,” said Sue Trinh, senior currency strategist at RBC Capital Markets in Hong Kong.

Even before Yellen spoke, U.S. interest rates futures implied traders had all but priced out any chance the Fed will raise rates at its policy meeting next week. And according to CME Group’s Fedwatch, there was only a 26 percent chance of a rate hike in July.

Against the yen, the dollar was flat at 107.65 yen JPY=, pulling away from Monday’s low of 106.35, its weakest in a month. The euro edged up 0.1 percent to $1.1370 EUR=, moving back toward Monday’s nearly one-month high of $1.1393.

Sterling rose 0.7 percent to $1.4530 GBP=D4, marking a solid rebound after hitting a three-week low on Monday. Two polls in Tuesday’s newspapers showed Britons narrowly favor remaining in the EU, in contrast to surveys released the previous day.

Source: Reuters