This morning, the Reserve Bank of Australia (RBA) left the key interest rate unchanged at 4.35 per cent in its last monetary policy meeting of the year. However, the tone surrounding this decision was noticeably more dovish, causing the AUD to weaken significantly in the initial reaction, Commerzbank’s FX analyst Volkmar Baur notes.

Economic development weaker than expected

“Two points stood out for FX traders. Firstly, the RBA had to admit that economic growth in Q3 was weaker than expected. The economic development is therefore weaker than expected, which argues in favour of a looser monetary policy. Furthermore, and this point is even more important, the wording around inflation was changed.”

“It now states that the RBA is more confident that inflation will move sustainably towards the middle of the RBA's target range (2-3%). In November, the RBA still stated that this is exactly what had to happen in order to start loosening monetary policy. There is still a long time to go before their next meeting in mid-February. Two labour market reports and the inflation figures for the fourth quarter will be published in the meantime.”

“The market will therefore be watching these data very closely in the coming weeks to gauge what to expect in February. We expect the RBA to cut interest rates in February. The market's assessment of the probability of such a move is currently a little higher than it was yesterday, at around 64% this morning. A full pricing-in over the next few weeks would weigh further on the AUD.”