Interestingly, the ‘normal’ reaction to an ‘on hold’ decision would be for the currency to remain relatively unchanged or move higher, although it’s pretty obvious that in this case the market has moved lower on the back of the Reserve Bank's relatively dovish statement.
One of the biggest standouts in the statement was the comment that the Australian dollar was higher than expected and that, given current levels of inflation, there was scope to ease monetary policy further.
Also, a number of brokers and analysts have mentioned that it looks like the Reserve Bank is taking its ‘lower Australian dollar-US dollar' game plan to the next level. In this global currency war, the bank is fast realising that Australia as a nation needs to get the currency down, especially given the weakness in the east coast economy and the coming peak in the mining investment boom.
For a long time, the Australian dollar was seen as a ‘risk on, risk off’ or commodity currency, as can be seen in the above chart.
From late 2008 through the beginning of 2011, it moved in lockstep with commodity prices. However, since then is has morphed into a safehaven currency as money from across the globe sought out higher yields and triple-A rated assets.
But now many people can’t understand why Australian stocks are rallying yet the dollar is remaining still. Normally they would have moved together. Well, that was when the dollar was highly correlated to commodity prices.
Nowadays it’s a completely different beast. As investors globally become more risk-tolerant and rotate out of safehaven assets, the attraction of the Australia’s triple-A rated economy and interest rate yield differential becomes far less important as those investors seek a greater return on their money.
As the great migration from safehaven to risk plays out, the Australian dollar will slowly unwind, providing a huge potential boost to the Australian economy and corporate earnings.