RBA Cuts Rates, AUDUSD Gains – What Gives?

Unsurprisingly, the Reserve Bank of Australia cut benchmark interest rates to a five decade low in the overnight session. The decision helped the AUDUSD gain on the session, now higher by 0.52%. Given the fact that rates were reduced, the day’s gains have some wondering – what just happened with the currency?

In a pivotal decision by the Reserve Bank of Australia, RBA Governor Glenn Stevens elected to reduce rates by another 25 basis points. The sixth time in just over a year, the overnight cash rate was reduced in order to bolster growth in an economy that is seeing the potential end of a mining boom. Now with rates at 3%, the central bank is hoping that looser monetary policy will translate into higher rates of expansion in other sectors of the economy. Incidentally, policymakers are additionally hoping that the lower OCR will alleviate some pressure on the local currency that has been “higher than might have been expected”.

Since the summer, the Australian dollar has appreciated by 9% against the US dollar, while advancing by an impressive 29% against the same greenback since the middle of 2010.

Although an RBA rate reduction usually calls for an AUDUSD sell, it seems that hints of an end to the current easing cycle is bolstering the major currency.

Today’s decision is likely to be the last rate cut decision by the RBA till at least the second quarter of 2013. Central bankers don’t meet again until February, and are unlikely to make any further adjustments. Instead, Governor Glenn Stevens and company are likely to keep a wait-and-see approach when it comes to the after effects of today’s decision. The sentiment is being supported by benchmark 5-year bond yields which rose on the session – up 4 basis points to 2.7%.

With any further easing decision likely on hiatus for the next three months, Australian dollar bulls are being bolstered off of support of 1.0400. However, the bullish momentum is in jeopardy ahead of major resistance at 1.0500-1.0525. Descending trendline at 1.0855-1.0624 is helping to reinforce the barrier prompting a likely decline to initial support at the 1.0306 November 15th session low.

AUDUSD ChartSource:  FXTrek Intellicharts
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