Going into the monetary policy meeting, A$ was trading near its 3 year lows because investors had been pricing in one more rate cut in 2014. According to the CFTC, there was also a significant amount of short positions in the Australian Dollar, so when the RBA said “on present indicators, the most prudent course is likely to be a period of stability in interest rates,” it immediately prompted short covering. For the first time in a number of months, the central bank also did not describe the Australian dollar as “uncomfortably high,” which suggests that they are comfortable with an AUD/USD exchange rate in the high 80s. By shifting from a dovish to neutral bias, the central bank is telling the market that they aren’t worried about the recent deterioration in Australian and Chinese data as they expect the recent decline in the Australian dollar to balance growth in the economy.
