Why the Australian dollar rose on a dovish RBA

<p>The Australian dollar is briefly rose above 0.6700 today after the RBA opted to leave interest rates unchanged.</p><p>It's atypical for a currency to rise after a rate cut and — as you can see from the chart — the Australian dollar initially fell on the announcement.</p><p>I think a portion of the move is a 'buy the fact' trade. The <a href="https://www.theaustralian.com.au/business/rbas-tough-rate-choice-at-lowes-reign-nears-its-end/news-story/d7b2b90e795a6c20bff20a88b7e98f7a?amp" target="_blank" rel="nofollow">commentary </a>from Terry McCrann certainly looked like a leak yesterday and that led to some AUD selling. The rebound may have been underpinned by short-term profit taking in a market that was thinned out by a US holiday.</p><p>I'll also entertain the idea that the market is no longer rewarding rate hikes because of the economic risks.</p><p>At the top of the hiking cycle, the risk of going to far may outweigh the risk of not killing inflation and I believe we're at that point on a few fronts. That's something to keep in mind ahead of next week's similarly-close Bank of Canada rate decision.</p><p>The thinking is that another hike would be a step too far and raise more financial risks, especially in a heavily-indebted housing market like Australia. A hike now, instead, would set up an undershoot in inflation down the line, diminishing currency attractiveness. There's also an element of growth-friendliness in keeping rates at moderate levels rather than stomping it with overly-hawkish policies.</p><p>So you could say that the market is arguing that inflation is over and that hiking further now is needless and will ultimately be counterproductive to a price-stability regime.</p><p>At this point, I wouldn't be overly confident about that thinking but next week's BOC will be another opportunity to test it.</p>

This article was written by Adam Button at www.forexlive.com.