RBA says inflation still too low, Aussie drops 0,7%
The Reserve Bank of Australia sounded a more dovish tone than expected, in the first of several meetings of central banks this week.
The Federal Reserve will begin its two day meeting on Tuesday, and would announce the start of the tapering of its asset purchases. The Bank of England meeting was on Thursday and the market was pricing in an interest rate rise.
In the past few weeks, investors have priced tightening from central banks as they think policymakers are concerned about rising inflation to end pandemic-era levels of easing.
Australia's central bank didn't show that hawkish pivot, which caused the Aussie dollar to lower as much as 0.7% to $0.7462, its weakest since Oct. 22.
The RBA said that inflation was still too low, but omitted its previous projection that rates were unlikely to rise until 2024, as it dropped a key target for the government bond in April 2024.
Analysts said the message was still more hawkish than previous RBA meetings, even if not as hawkish as markets had anticipated.
The RBA's message was successful in at least маргинально scaling down hawkish bets, although the markets are still pricing in 76 basis points of tightening in the next 12 months, said ING analysts in a research note.
There is still a gap between AUD and Aussie rates, with the former being relatively small jump as rates sold off last week and now seems to be over-dicounting the post-RBA correction in yields, they said, adding that the short-term risk for the Aussie skewed to the upside of New Zealand's dollar, losing 0.2% to $0.7174.
The same inflation dilemma hangs over other central banks and kept currency markets treading water as they waited to see whether policymakers were ready to dial back stimulus.
We expect Federal Open Market Committee to state that the Fed is ready to act decisionally if inflation doesn't move towards target levels when it starts to tapering ends, but it still expects inflation to fall as supply constraints ease. We think investors will see this as a prediction of the likely timing of Fed rate hikes, said Standard Chartered's head of G 10 FX, Steve Englander.
The dollar index traded flat at 93.918, having a 0.25% loss from Monday when it retreated from a 2 week high of 94.313.
The pound was on the back foot, slipping 1% to $1.365.
The dollar weakened by 0.3% to 113.62 yen, to continue to consolidate below its four-year peak of 114.695 reached on Oct. 20.