The Australian dollar bounces as the RBA keeps rates steady

Will Russell/AFL Media/Getty Images
  • The Australian dollar pushed higher on Tuesday, gaining against all major crosses except the Japanese yen.
  • The RBA kept Australia’s cash rate steady at 1.5% in May, sparking a bout of short covering after the decision was announced. However, increased concern over an escalation in US-Sino trade tensions help to limit the Aussie’s gains.
  • Chinese trade data for April will be released in the second half of the Asian session.
  • The RBNZ will also announce its latest interest rate decision. As was the case before the RBA, the prospect of a 25 basis point cut is deemed to be a line-ball call.

The Australian dollar pushed higher on Tuesday following the RBA’s interest rate decision, although the gains were limited by a souring in risk appetite as US-Sino trade concerns intensified.

Here’s the scoreboard at 7am in Sydney on Wednesday.

AUD/USD 0.7011 , 0.0022 , 0.31%
AUD/JPY 77.29 , -0.12 , -0.16%
AUD/CNH 4.7633 , 0.0306 , 0.65%
AUD/EUR 0.6263 , 0.0023 , 0.37%
AUD/GBP 0.5363 , 0.0027 , 0.51%
AUD/NZD 1.0620 , 0.0051 , 0.48%
AUD/CAD 0.9444 , 0.0035 , 0.37%

After oscillating around .7000 level in the first half of Asian trade, the AUD/USD jumped to as high as .7050 following the RBA’s May monetary policy decision. The bank decided to keep Australia’s cash rate steady at 1.5%, bucking expectations among a slim majority of economists that policy rates would be cut by 25 basis points.

Markets were also pricing in a meaningful risk of a rate cut being delivered, so the decision to keep policy settings stable sparked a bout of short covering among traders.

Mixed Australian economic data released during the session — retail sales volumes fell unexpectedly in Q1 while the trade surplus remained near the highest level on record — was largely overlooked by markets ahead of the RBA decision.

After attempting to break above .7050 in early European trade, the AUD/USD’s gains were trimmed as risk sentiment soured on increased concern that trade tensions between the United States and China could escalate further in the days ahead.

Although Chinese vice premier Liu He will still travel to the United States this week for trade talks, news the United States will lift tariffs on Chinese imports entering the country on Friday should a resolution to current trade frictions not be reached, along with reports China will introduce retaliatory tariffs of its own in response should the US move, sparked a wave of risk aversion across stocks and commodity markets in European and North American trade.

That also spilled over into currency markets, ensuring the Aussie’s post-RBA gains, both against the US dollar and other major crosses, were kept in check.

Investing.comAUD/USD Hourly Chart

Reflecting the risk-off tone during the session, the Aussie actually fell against the Japanese yen which was supported by safe-haven buying.

Looking ahead, it will be a busy session in Asia with a number of major economic and central bank events scheduled.

On the data docket, Chinese trade data for April, likely to arrive at some point after 1pm AEST, is the undisputed highlight, especially its trade balance with the United States.

On the central bank front, it will be the turn of the Reserve Bank of New Zealand (RBNZ) to dominated proceedings, following in the footsteps of the RBA a day earlier.

As was the case before the RBA monetary policy decision, financial markets deem to prospect of a 25 basis point rate cut, taking New Zealand’s cash rate to 1.25%, as a line-ball call.

“14 out of 20 economists surveyed by Bloomberg expect a 25bps cut in the OCR to 1.5%. The market is slightly weighted towards an unchanged rate today,” said David de Garis, Economist at the National Australia Bank.

“This sets the scene for a market reaction, no matter what the Bank announces.”

The RBNZ decision will arrive at midday AEST.

Later in the session, other highlights include German industrial production, Canadian housing starts along with crude oil inventory data from the EIA in the United States.

ECB president Mario Draghi, along with Brainard of the US Fed, will also be in action.

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