RBA finally lowers rates, Aussie shrugs

The Australian dollar is drifting on Tuesday after three straight days of gains.  In the European session, AUD/USD is trading at 0.63671, up 0.09% on the day.

RBA lowers rates to 4.1%

The Reserve Bank of Australia cut the cash rate by a quarter-point on Tuesday to 4.10%.  The decision was widely expected and the Australian dollar has shown little reaction.  Still, the move is a milestone, as the RBA delivered its first rate cut in over four years.  The central bank has maintained rates at 4.35% for over a year, as it remained concerned about the upside risk of inflation, even as headline CPI has fallen back within the 2%-3% target.

The rate statement was on the hawkish side, with RBA members stating that while the decision “recognises the welcome progress on inflation, the Board remains cautious on prospects for further policy easing”.  This was a message to the market not to expect a series of rate cuts this year and to expect the easing cycle to be short-lived.  The statement noted that the labor market has been “unexepectedly strong” and uncertainty remained about domestic economic activity and inflation.

The RBA rate cut also carries significant political implications.  Prime Minister Anthony Albanese’s Labor government is in a tight election race and Albanese will be try to use the rate cut to his advantage and argue that the move is a result of the government’s economic policies.

Australia releases wage growth on Wednesday.  The wage price index for the fourth quarter is expected to remain at 0.8% q/q and dip to 3.2% y/y from 3.2% in the third quarter.

AUD/USD technical

• There is resistance at 0.6402 and 0.6452.

• 0.6318 and 0.6268 are the next support levels.