RBA holds steady, while dollar gains momentum

8 February, 2017

RBA holds steady, while dollar gains momentum

On Tuesday, we got an important update from the Reserve Bank of Australia, which made no changes in its easing programme. The interest rate remained unchanged at a record low of 1.5%, after two cuts in the past year. The head of the RBA, Philip Lowe, pointed to a flattened economic growth that was in line with the policies of the central banks of the other three major countries – the United States, European Union and Japan. The policy makers are in no hurry to tighten the policy, as the upward trend in the global economy has not managed to gain momentum, according to their views. The Australian dollar retreated from the peaks after multi-day advance, as the rhetoric of the RBA was enough to rekindle rumours about further rate cuts.

Despite full support from the world’s main central banks, there has been forming a reversal trend on equity markets of both developed and developing countries, due to the rise of political instability in the US and Europe. Fundamental changes in the political structure of the USA initiated by Trump, as well as the potential rise to power of the separatist-minded parties in France, have forced investors to move into defensive assets.

The Japanese yen, the traditional “safe haven” for investors, strengthened to a two-month high against the dollar, whereas increased demand for the Swiss franc forced USDCHF to retreat from December peaks of 1.0270 to the November low of 0.9961. The growth dynamics of these currencies partially overlapped with the strengthening of the US dollar, that regained growth after a mixed response to the employment report last week. An outrage expressed by Trump that the dollar rally has gone too far, could cause a short-term selloff, scaring away part of the dollar bulls. Data on inflation, the labour market, consumer confidence, as well the forecast for the increase in fiscal stimulus created a lasting impression that the dollar is undervalued. Only political uncertainty makes the rise unconfident, with more discreet moves and caution.

The European currency tries not to give up, taking attempts to recover despite the pressure on the dollar. CFTC positions indicated a significant reduction in bearish positions on the euro, but the lack of support from the ECB, as well as political instability made bullish wagers highly questionable. Falling below $ 1.0650 could negate all prospects for growth, sending the EURUSD pair in a nosedive decline.


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