The Australian and New Zealand Dollars are under pressure on Tuesday as investors react to the release of latest monetary announcements from the Reserve Bank of Australia (RBA). Traders are reacting negatively to the disappointing news that the central bank sharply upgraded forecasts for the local economy yet still predicted no tightening in its super-loose policy until at least 2024.
At 08:47 GMT, the AUD/USD is trading .7725, down 0.0038 or -0.49%.
Rates on Hold
The RBA wrapped up its May policy meeting by holding rates at 0.1% as widely expected, while reiterating a hike was unlikely until 2024.
Major Decisions Pushed to July
The RBA said it would decide at its July meeting whether it would roll over its three-year bond target from the April 2024 line to the November 2024 note, and whether to expand its bond buying programme for a third time.
Analysts suspect that a decision not to roll over the bond target would be seen in the market as an early step toward tapering, which could put upward pressure on bond yields.
“We reiterate our view that the Bank will announce an additional A$100 billion of bond purchases in July, though we expect it to maintain the April 2024 bond for its 3-year yield target rather than switch to the November bond,” said Marcel Thieliant, senior Australia economist at Capital Economics.
RBA Turns More Bullish on Outlook
The commitment to long-term stimulus came even as the bank turned more bullish on the outlook. Notably, the bank now saw unemployment falling to 4.5% by the end of next year, down a full percentage point from its previous forecast and closer to estimates of full employment.
The AUD/USD is dropping because domestic yields are falling, making the Australian Dollar a less-attractive asset. Market pricing suggests investors assume the RBA’s bond target will not be rolled over, with three-year yields down near the target of 0.1% while four-year bonds trade up at 0.46%.
Yields on 10-year bonds dipped to 1.68% on Tuesday, but have spent two months unable to break under 1.62%.
Traders are also monitoring commodity prices. CBA’s head of international economics, Joseph Capurso, estimated the rise in commodities had lifted the Aussie’s fair value to $0.8400, within a range of $0.0078 to $.8900.
With the AUD/USD currently trading just above $.0077, by these measures, it’s grossly undervalued. However, prices aren’t likely to rise much unless real rates rise or the RBA starts the tightening process.