The Australian dollar is soaring, but it's not for the reasons you think

Photo by Renee McKay/Getty Images

The Australian dollar ripped higher overnight, a somewhat unusual reaction given the Reserve Bank of Australia’s decision to cut interest rates on Tuesday should — in textbook economics — have seen it come under pressure.

It was not that the Aussie was strong but rather that the US dollar was weak, thanks largely to disappointment towards the Japanese government’s 28 trillion fiscal stimulus package that was interpreted by markets as policy akin to a wet lettuce leaf.

The USD/JPY plunged like a stone, weakening the US dollar across the board, including against the Aussie.

For all the “if the RBA wanted to weaken the Aussie dollar by cutting rates they’ve failed miserably crowd”, the surge overnight had nothing to do with the RBA. Indeed, had the bank left rates steady yesterday, the Aussie could easily have finished above 77 US cents.

It was a global move in currencies, driven almost entirely by strength in the Japanese yen.

The five-minute tick chart below shows movements in the AUD/USD and USD/JPY from the moment the RBA cut rates on Tuesday. The USD/JPY scale has been inverted.

If you think there are similarities between the two, you’d be right. The common denominator in both is that they’re valued against the US dollar.

Source; Thomson Reuters Eikon

After rising to as high as .7638 at the start of US trade, the AUD/USD eventually finished Tuesday’s session at .7609, up a lazy 1% from Monday’s close.

It currently trades at .7602 as at 7.55am AEST.

After a whirlwind session yesterday, the economic data and events calendar slows on Wednesday with second-tier releases scheduled domestically and across the Asian region.

There’ll be passing interest in services PMI reports released in Australia, Japan, China and India, but they’re unlikely to generate any significant movement in the Aussie.

Later in the session, there’ll be a raft of services PMI gauges released across Europe and the US. Elsewhere Eurozone retail sales and the ADP National Employment report in the US will also be released.

With July’s US non-farm payrolls report due out on Friday, markets will be paying close attention to the ADP figure, along with the employment subindex in the ISM non-manufacturing PMI report, for clues as to how the US labour market is performing.

Here’s the Aussie dollar scoreboard, as at 7.55am AEST.

  • AUD/USD 0.7602 , -0.0007 , -0.09%
  • AUD/JPY 76.69 , -0.07 , -0.09%
  • AUD/CNH 5.0414 , -0.0051 , -0.10%
  • AUD/EUR 0.6772 , -0.0004 , -0.06%
  • AUD/GBP 0.5693 , -0.0002 , -0.04%
  • AUD/NZD 1.0497 , 0 , 0.00%

NOW WATCH: Money & Markets videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.