Australian, New Zealand Dollars Hold Up Despite RBA Rate Cut

Australian, New Zealand Dollars Hold Up Despite RBA Rate Cut, Japanese Yen Slips as Dow Gains 3.3%

The Australian dollar and New Zealand dollar both managed to edge higher on Tuesday despite the Reserve Bank of Australia’s 100bp rate cut on Monday evening to 4.25 percent.

While AUD/USD did initially spike lower, indications that the RBA would take a more neutral stance in coming months allowed the currency to recover. Meanwhile, the Japanese yen edged lower on a slight pick up in risk appetite, as evidenced by the 3.3 percent gain the Dow Jones Industrial Average and nearly 4 percent rise in the S&P 500. Indeed, there is still a relatively tight inverse correlation between the yen and US equity indexes. During the next 24 hours, GDP results due to be released at 19:30 ET tonight are expected to show that growth in Australia slowed further during Q3 to a 0.2 percent pace, down from 0.3 percent in Q2. While the economy has been relatively resilient compared to countries like the US and the UK, the Reserve Bank of Australia has already said that they expect growth to cool further and bring down inflation pressures, which is why the bank slashed interest rates. Meanwhile, the Reserve Bank of New Zealand has cut rates during their past three meetings, each more aggressive than the last, and the same is expected for the RBNZ’s next rate announcement on Wednesday at 15:00 ET. Indeed, a Bloomberg News poll shows that economists anticipate that the central bank will slash rates by a whopping 150 basis points to a 5-year low of 5.00 percent.

Following the bank’s last rate decision, RBNZ Governor Alan Bollard suggested that future rate cuts would depend on data confirmation of easing inflation pressures and “how the global financial developments play out.” Thus far, economic data in New Zealand has signaled cooling price growth, as the RBNZ’s 2-year inflation expectation survey fell to 2.7 percent from 3.0 percent in Q4 and food prices fell negative for the first time in 14-months during October.
Meanwhile, financial market conditions have only deteriorated, leaving the odds in favor of a sharp rate cut by the RBNZ that could trigger declines in the New Zealand dollar on Wednesday. Traders should beware though that if the RBNZ's policy statement suggests they may leave rates steady during their next meeting, the Kiwi could actually gain.

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