The RBA just passed the baton on the Aussie dollar to the US Federal Reserve

Getty/Mike Ehrmann

The Reserve Bank of Australia cut the official cash rate to 2% this afternoon but after an initial sell-off, the Aussie dollar has rallied hard.

The reason it’s now above 79 cents, and more than a cent higher than the low of the day at at 0.7796, is that the RBA statement has dropped the easing bias.

That won’t have surprised the RBA, not by any stretch of the imagination.

They have been managing a small open economy with a floating exchange rate since December 1983. They have shepherded the economy and the Aussie through a range low at 0.4775 and a high of 1.1080 over the intervening 32 years. For the most part of that period they have also been able to keep the Australian economy from recession’s rocky shores.

But if the RBA knew that in dropping the easing bias the Aussie might rally how does that square with the governor’s statement which said:

The Australian dollar has declined noticeably against a rising US dollar over the past year, though less so against a basket of currencies. Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices.

The answer is that the RBA must firmly believe that the US dollar pullback currently being experienced, which lifted the Euro above 1.12 and the Aussie above 80 cents last week, is transitory.

That suggests the RBA firmly believes the Fed is on track to tighten US monetary policy in the coming months and that the US dollar strength will naturally add a weight to the Aussie dollar, driving it lower.

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