SYDNEY (Dow Jones)--The Australian dollar slid broadly Tuesday as the country's central bank kept interest rates steady and failed to meet market expectations that the bank would signal an increasing likelihood of rate hikes down the road.
Australian bonds surged on the Reserve Bank of Australia, or RBA, decision and policy statement, particularly on the short end of the curve.
After trading in a narrow range for much of the morning, the Australian dollar fell quickly as though the RBA flagged a clear tightening bias with rates, it signaled it may hold off until volatility in global markets eases.
"Given that international influences are unlikely to be resolved anytime soon, (I'm) happy enough to say they're on hold for the remainder of the year," said David Scutt, treasury dealer with Arab Bank Australia.
At 0600 GMT, the Australian dollar was at US$1.0925, down from US$1.1050 late Monday and off from a 30-year high of US$1.1080 last week. Against the Japanese yen, the Australian dollar was at Y84.57, down from Y84.89.
To be sure, some in the market forecast the big drop could be reversed somewhat as European traders come to their desks. Kathleen Brooks, research director at Forex.com, said not to expect the decline to be the start of a new downtrend.
"I think people will still say strong Aussie dollar in the medium term. People are set up enough to come in and buy on lows around US$1.0870 and we would expect it to bounce to somewhere around US$1.1000," said Brooks.
As the currency slid, bond prices rallied and the interest rate swaps market moved to price in 40 basis points of cuts within the next twelve months.
Su-Lin Ong, senior interest rate strategist at RBC Capital Markets, said the move reflected over-aggressive positioning and not a new belief that the bank won't be hiking rates anytime soon.
"It was a case of the markets anticipating a hawkish statement but in the end got a pretty balanced statement. There's a clear scramble and a pretty decent move, but we might come off these levels a bit," said Ong.
The three-year Australian bond futures were particularly moved by the statement, trading up 22 ticks at 95.72 late Tuesday, near recent highs and resistance of 95.73.
-By Geoffrey Rogow, Dow Jones Newswires; +61-2-8272-4686; geoffrey.rogow@dowjones.com
