RBA's optimism on inflation expected to buoy Aussie dollar
The Aussie rose against the yen after minutes of the Reserve Bank's March 5 meeting said there were signs the economy was responding to low interest rates. New Zealand's currency slid against most major peers after Finance Minister Bill English said the currency was overvalued and he expects interest rates to stay lower for longer.
"The deputy governor is sounding the victory bell on inflation in the mining boom," said Andrew Salter, a currency strategist at ANZ.
"We managed to come through the boom without an excessively high level of inflation. It's hard to see a long-term short position in the Australian dollar bearing any fruit," he said referring to bets that an asset will decline.
The Australian currency slid 0.2 per cent to US103.85¢, after touching US104.15¢ on March 15. That was its highest since February 5.
The Aussie added 0.2 per cent to ¥99.24. New Zealand's kiwi weakened 0.1 per cent to US82.56¢.
Dr Lowe said a stronger currency and higher savings rate have helped contain inflation and allowed lower interest rates even as the mining industry boomed.
"These factors have helped Australia to digest a huge investment boom without generating substantial imbalances in the economy," he said in Sydney.
"The market will certainly interpret the comments in a positive light," said ANZ's Mr Salter.
"They will encourage the market to continue pricing in a normalisation of policy in Australia." ANZ expects the RBA to hold benchmark borrowing costs unchanged in April.
Interest-rate swaps data indicate a mere 13 per cent chance the RBA will cut the benchmark rate at the next meeting on April 2.
Australian bonds retreated as US stock futures and Asian shares rallied.
The three-year bond yield rose 8 basis points, or 0.08 percentage points, to 3.02 per cent from Monday, when it dropped 17 basis points.
The 10-year rate climbed eight basis points to 3.56 per cent.
Standard & Poor's 500 Index futures rose 0.1 per cent, while the MSCI Asia Pacific Index advanced 0.6 per cent.
Australia's bond market is benefiting from strong international demand for assets in the nation's currency, RBA assistant governor Guy Debelle said.
The Aussie has gained 2.3 per cent in the past six months, according to Bloomberg Correlation-Weighted Indexes. Its New Zealand counterpart has risen 3.1 per cent in the same period.
Demand for the kiwi was hampered after the Finance Minister said the currency was overvalued and could reverse course.
"There may be a correction in valuation with the exchange rate when the US economy is clearly picking up, and there are signs of that now," Bill English said in an interview in Hong Kong. The strength in the currency is "driven to a large extent by quantitative easing".
Mr English's words "add to some of the bearish tone we've seen around the New Zealand dollar", said Jonathan Cavenagh, a currency strategist in Singapore at Westpac Banking Corp.
"I still think the currency is going to be pretty well supported on dips."
South Korea's won snapped its longest run of losses in almost five years while the Malaysian ringgit strengthened against the dollar.
Meanwhile, emerging-market stocks rose on overseas markets for the first time in seven days as concern about Europe's debt crisis eased and the lowest valuations in three months lured investors.
Japan's Samsung Electronics, which relies on Europe for at least 17 per cent of sales, advanced the most in a month in Seoul after falling 2.4 per cent on Monday.
Haier Electronics Group jumped 4.6 per cent in Hong Kong after profit gained.
The MSCI Emerging Markets Index climbed 0.3 per cent to 1033.59 in afternoon trading in Hong Kong, halting a six-day, 3.4 per cent slump.
Indian stocks also rose before the central bank meets to review monetary policy.
Frequently Asked Questions about this Article…
Philip Lowe said a stronger exchange rate and higher household savings have helped contain inflation and stabilise the economy during the mining boom. His comments were seen as positive for the Aussie because they suggest Australia absorbed big investment without major imbalances.
The Aussie briefly hit a five-week high (touching US104.15¢ on March 15) and later traded around US103.85¢. Markets interpreted RBA comments as supportive of a normalisation in policy, helping to buoy the currency.
Interest-rate swaps priced only about a 13% chance of an RBA rate cut at the April meeting, and ANZ expected the central bank to hold benchmark borrowing costs unchanged in April — reflecting market confidence in the RBA’s cautious stance.
Short- and long-term yields rose: the three-year bond yield increased about 8 basis points to 3.02% and the 10-year climbed to 3.56%. Rising yields affect fixed-income returns, borrowing costs and can influence share valuations, so investors should watch yield shifts alongside central bank commentary.
The kiwi slipped after Bill English said it was overvalued and suggested interest rates there could stay lower for longer. He also noted the currency’s strength was largely driven by quantitative easing, which dampened demand for the kiwi.
US S&P 500 futures rose about 0.1% and the MSCI Asia Pacific Index advanced 0.6%. Emerging-markets stocks also recovered, with the MSCI Emerging Markets Index up 0.3% to 1,033.59, as investors returned amid easing concerns about Europe’s debt trouble.
Samsung Electronics led gains in Seoul after a recent fall, posting its biggest advance in a month, while Haier Electronics Group jumped 4.6% in Hong Kong after reporting profit growth — examples of company-specific moves that can drive regional market sentiment.
Central bank remarks (like those from the RBA and New Zealand officials) can shift expectations about inflation and interest rates, which in turn move currencies, bond yields and stocks. Investors should watch official statements, exchange-rate trends and bond-market moves as part of assessing macro risk—while remembering to align decisions with their own time horizon and risk tolerance.
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