The Australian dollar plunged nearly a cent today after the Reserve Bank of Australia surprised investors by skipping a chance to raise rates even though it said more tightening was on the cards.
The dollar fell as far as $US0.9565 and was hammered the most against the New Zealand dollar after the RBA left rates unchanged at 4.5 per cent. That confounded the market's bet on a 75 per cent chance of rates rising to 4.75 per cent.
The Aussie dollar's plunge was accentuated by stop-loss selling below $US0.9626, but it quickly found its feet on speculation the RBA would hold true to its hawkish stance by hiking in November, after third-quarter inflation data is out.
At the local close of trade, the dollar was buying $US0.9575, down sharply form yesterday's close of $US0.9695.
"The RBA does not like to have a strong hawkish bias for an extended period without acting," said George Tharenou, an economist at UBS. "We put today's on-hold decision down to timing, and still expect a rate hike before year-end, most likely in November."
Indeed, the market still sees a one-in-three chance of rates rising to 4.75 per cent next month, but was no doubt less hawkish than before having just been burnt by the RBA.
The November interbank contract jumped 0.175 points to 95.42, its largest daily move in absolute terms in five months.
December bill futures surged 0.19 points while three-year bond futures rallied 0.10 points. The cash yield curve steepened dramatically to 21 basis points, from a two-year low of 12.4 basis points seen on
Monday.
Swap rates plummeted across the curve, with one-year rates dropping to 4.9825 per cent, down sharply from a two-year peak of 5.2025.
Against other currencies, the Aussie dollar took the biggest hit against the kiwi dollar by skidding as far as $NZ1.2934, way below $NZ1.3112 seen before the RBA announcement.
Even bold policy easing from the Bank of Japan did not manage to support the Aussie dollar on the yen. It fell to 80.23 yen, from Monday's 80.84.
But some analysts said Tuesday's sell-off aside, the Aussie dollar was still a solid buy, even at present lofty levels.
"Any temporary pull-back in Australian dollar is exactly that. We do expect interest rates to go higher," said Stephen Roberts, an economist at Nomura.
Roberts said he expected the currency to hit parity on the US dollar in 2011 and hold above $US1.00 for years.
Reuters