Aussie rises on hawkish RBA

The Australian dollar continues its upswing and has posted considerable gains on Tuesday. AUD/USD is currently trading at 0.7396, up 0.51% on the day.

Analysts had widely expected that the RBA would maintain its benchmark interest rate and bond purchases, and this proved correct. However, the central bank managed to surprise the markets in announcing that it would stick to its plan to taper bond purchases in September. There were widespread expectations that due to a resurgence in Covid cases, the RBA might walk delay its planned taper, which it announced in July. In the end, the Bank was more hawkish than expected, which provided the Australian dollar with a lift.

The size of the taper is quite modest, with a reduction in bond purchases from AUD 5 billion per week to 4 billion. However, what is more important is the message to the markets that the RBA is tightening policy, and that further tightening can be expected, provided that the economy continues to recover.

RBA Governor Philip Lowe sounded positive about the economic outlook, despite the recent upsurge in Covid. Lowe emphasized the resilience of the economy, stating that “the experience to date has been that once virus outbreaks are contained, the economy bounces back quickly”.

Even with the surprise taper announcement, the RBA’s monetary policy remains dovish. The taper program will be reviewed in November, and Lowe reiterated that economic conditions will not be ripe for a rate hike prior to 2024.

The RBA will also be in the spotlight later in the week. RBA Governor Lowe testifies before lawmakers on Thursday and the RBA releases quarterly economic forecasts on Friday.

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