The Reserve Bank of Australia cut the interest rate from 2.50% to 2.25%. This is a record low interest rate for the land down under.The RBA went in the footsteps of the BOC with a move that was not pre-announced and the focus is on the still strong Aussie, according to the Bank.
While this was speculated by some market participants, it was certainly not priced into AUD/USD which tumbled down over 160, and going.
More rates or more tools?
It is unclear if this the first move out of many more to come. There were no clear hints about this in the accompanying statement set out by RBA governor Glenn Stevens and his colleagues They did note the fall in commodity prices quite a bit.
They are somewhat worried about the economy with a forecast of it running with spare capacity for quite some time. What about the housing situation? The statement did not include a mention of Sydney housing and the solution is to work with other regulators to assess and contain the risks.
Currency War
But the Bank certainly talked about the currency:
The Australian dollar has declined noticeably against a rising US dollar over recent months, though less so against a basket of currencies. It remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices. A lower exchange rate is likely to be needed to achieve balanced growth in the economy.
Here is the last paragraph from the statement where they explain the rate cut. Note how they talk about monetary easing and development in Australia and abroad in the same sentence. Is Glenn Stevens hinting that monetary easing elsewhere also had an impact on the decision?
For the past year and a half, the cash rate has been stable, as the Board has taken time to assess the effects of the substantial easing in policy that had already been put in place and monitored developments in Australia and abroad.
AUD/USD traded around 0.78 before the decision in anticipation and ignored economic data from Australia. But when the decision came the A$ fell sharply to around 0.7650.
The fall resumes in the European session, with a fall to a new of 0.7632. We are in levels last seen in 2009. The NZD also fell.
Will AUD/USD fall to 0.75 as Stevens wants?
Here is how it looks on the chart:
