Aussie slides on unexpected RBA move
The Australian dollar plunged more than one US cent after the Reserve Bank of Australia (RBA) surprised markets by leaving the cash rate on hold.
At 6pm AEDT, the local unit was changing hands at 95.76 US cents, down from Monday's finish of 96.96 cents after the RBA left rates unchanged at 4.5 per cent. It was buying at 80.21 Japanese yen, a decline from yesterday 's close of 80.82 yen, and at 69.85 euro cents, down from its previous close of 70.46.
The Aussie's plunge was accentuated by stop-loss selling below $US0.9626, but it quickly found its feet on speculation the central banl would hold true to its hawkish stance by lifting rates in November, after third-quarter inflation data is out.
"The RBA does not like to have a strong hawkish bias for an extended period without acting," economist at UBS George Tharenou said.
"We put today's on-hold decision down to timing, and still expect a rate hike before year-end, most likely in November."
4Cast head of research Ray Attrill said the market had now priced in a 36 per cent chance of an interest rate hike next month. "Bonds are up after they didn't raise rates. The market has pretty much repriced."
The November interbank contract jumped 0.175 points to 95.42, its largest daily move in absolute terms in five months.
December bill futures climbed 0.19 points while three-year bond futures rallied 0.10 points.
The cash yield curve steepened dramatically to 21 basis points, from a two-year low of 12.4 basis points seen on Monday.
Swap rates plummeted across the curve, with one-year rates dropping to 4.9825 percent, down sharply from a two-year peak of 5.2025.
With Tuesday's sell-off aside, some analysts said the Aussie dollar was still a solid buy, even at present lofty levels.
"Any temporary pull-back in Australian dollar is exactly that. We do expect interest rates to go higher," according to Nomura economist Stephen Roberts.
He said he expected the currency to hit parity with the greenback in 2011 and hold above $US1.00 for years.
With Reuters