AUD/USD and NZD/USD Fundamental Daily Forecast – RBA ‘Prepared to be Patient’ after Keeping Rates on Hold

The Australian and New Zealand Dollars are edging higher early Tuesday after the Reserve Bank of Australia (RBA) voted to leave its benchmark interest rate at the historically low 0.1% level and maintain its bond buying levels. The move was in line with expectations although some economists argued policymakers could follow their U.S. counterpart in signaling an earlier winding down of stimulus.

At 05:20 GMT, the AUD/USD is trading .7079, up 0.0028 or +0.40% and the NZD/USD is at .6766, up 0.0011 or +0.17%. On Monday, the Invesco CurrencyShares Australian Dollar Trust (FXA) ETF settled at $69.94, up $0.41 or +0.59%.

Kiwi traders responded to the news positively, but the early strength suggests light short-covering rather than aggressive buying.

Today’s policy meeting was the last of the year. The next one is scheduled for February 2022. In coming to its decision, the RBA board noted the emergence of the Omicron variant, but was confident it would not derail what has been a rapid economic recovery, Reuters noted.

In November, the RBA surprised economists by dropping a commitment to keeping bond yields low, but it didn’t signal a shift toward an early end to its bond buying campaign unlike the Federal Reserve is expected to do at its December meeting.

Last week, Federal Reserve Chair Jerome Powell surprised investors by saying policymakers would discuss a quicker tapering of its asset buying, and thus an earlier hike in interest rates.

Although the RBA stuck with plans to reconsider its bond purchases in February when it will hold A$350 billion ($246.51 billion) of Australian government debt, most analysts assume the Board will halve its buying to A$2 billion ($1.41 billion) a week and cease by mid-year, though there was also a risk it could just stop altogether in February, Reuters reported.

In summary, the RBA was upbeat on the economic outlook as high vaccination rates allowed the lifting of coronavirus lockdowns.

“The Board is committed to maintaining highly supportive monetary conditions to achieve its objectives,” said RBA Governor Philip Lowe. “This is unlikely to take some time and the Board is prepared to be patient.

Short-Term Outlook

We could see a short-covering rally in the AUD/USD, but it is not likely to become a trend-changing event. The divergence in policy between the U.S. Federal Reserve and Reserve Bank of Australia still favors the U.S. Dollar over the Australian Dollar.

For example, the Fed is worried about rising inflation in the U.S. with Chairman Powell dropping the word “transitionary” last week in his testimony before Congress. On Tuesday, RBA Governor Philip Lowe said, “Inflation has increased but, in underlying terms, is still low at 2.1 percent.” Lowe further added, “The board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 percent target range.

For a look at all of today’s economic events, check out our economic calendar.

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James Hyerczyk

James A. Hyerczyk has worked as a fundamental and technical financial market analyst since 1982. His technical work features the pattern, price and time analysis techniques of W.D. Gann.