The Australian dollar jumped and closed with a big gain yesterday after the central bank’s head signaled that he may pause interest rate cuts and said that he is not going to target a particular level of the exchange rate.
Reserve Bank of Australia Governor Glenn Stevens was speaking to the House of Representatives Standing Committee on Economics yesterday. He mentioned impact of the strong currency on inflation:
The high exchange rate has lowered prices for tradable goods and services and so helped to hold down measures of inflation over the past couple of years.
Stevens added that “the exchange rate remains somewhat higher than one might have expected”. He admitted that the currency’s performance influences policy decisions, but claimed that the central bank is not targeting particular price for the currency:
This has been a relevant factor in the setting of interest rates. It is not that interest rates are seeking a particular exchange rate response, but they are being set with a recognition of the exchange rate’s effect on the economy.
The Governor did not mention that the bank will act to reduce the exchange rate. Furthermore, he said that “there is a good deal of interest rate stimulus in the pipeline”. Such words made economists think that the RBA will refrain from decreasing interest rates in near term as the bank will assess the impact of the current accommodative policy on the nation’s economy.
AUD/USD jumped from 1.0244 to close at 1.0328 and AUD/JPY surged from 95.35 to 96.50 yesterday. EUR/AUD tumbled from the opening of 1.2871 to the closing price of 1.2762.
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