Australia central bank misses its target with message on national currency, rates

By Rizza Sta. Ana

Sep 07, 2013 01:17 PM EDT

According to a Reuters report, the Reserve Bank of Australia (RBA) was desperate in wanting to see its national currency, the Australian dollar, much lower to help its country cope and "rebalance" its economy. The Australian central bank credited this view as the reason why it had reduced interest rates last month to a record low of 2.5%. However, RBA failed to include an annoucement explicitly saying that it would be still cutting rates should the need arises. 

Triple T Consulting analyst Sean Keane said, "In attempting to talk down the Aussie, the bank has inadvertently strengthened it by allowing the market to reduce the forward interest-rate discount that had assumed further RBA rate cuts." Triple T Consulting works for Credit Suisse.

Senior economist Brian Redican at Macquarie Bank commented. "But all the market hears is 'no more rate cuts'. One escape route would be just to pledge to do whatever it takes on rates to get the economy moving. That would force the market to price cuts back in, and then the dollar would fall."

Although reactions to RBA's statement may have driven the Aussie dollar up to more than two US cents to USD0.9126, borrowing costs were a different story. Two-year government debt yields rose to 2.87% at 28 basis points, far from a low 2.35% that was seen back in early August. 10-year paper yields jumped to 4.5%, which was an 18-month high. However, part of the spike in the 10-year paper rate was credited to the reaction to the US Treasury yield increase. 

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