The RBA hiked its interest rate by another 25 basis points to 4.5% in Tuesday’s Asian session.
It was the sixth increase in the benchmark interest rate in the past seven meetings, but in the statement the RBA said that rates should now be “around average levels.”
From the Statement: “With the risk of serious economic contraction in Australia having passed some time ago, the Board has been adjusting the cash rate towards levels that would be consistent with interest rates to borrowers being close to the average experience over the past decade or more. The Board expects that, as a result of today’s decision, rates for most borrowers will be around average levels. This represents a significant adjustment from the very expansionary settings reached a year ago.”
That dovish statement pressured the Australian Dollar, and with equity markets around the world selling-off as a result of the break down in confidence over the EU/IMF bailout of Greece and a sharp increase in risk aversion, the Aussie tumbled against the greenback.
The RBA announcement was a classic case of “buy the rumor, sell the news” as we had a rally to end last week from the 0.9150 level to 0.9320. However, in today’s trading following the actual announcement, despite the increase to the benchmark rate, the pair experienced a sell-off prior to the acceleration of the losses as we got into the European session.
In a look at this pair with weekly candles, we see the stiff resistance the pair was running up against prior to the announcement. With news that the RBA may be done tightening for now, the increase in risk aversion as a result of the woes in the Euro-zone, and news that China was raising the amount of deposits banks have to set aside as reserves to fend off inflationary pressures and cool the economy all lined up to cause the sharp slide in the pair we saw this session.
Going forward it will be important to see how Australian growth holds up following the increase of the benchmark rate to 4.5% and what effects China’s moves will have on their demand for Australian exports (China’s benchmark Shangahai Composite index fell to a seven month low).
