The Australian dollar staged a sharp recovery on Tuesday as upbeat domestic data and a balanced policy update from the Reserve Bank of Australia (RBA) led markets to pare back expectations on the speed and scale of any future easing.
The dollar rallied 0.4 per cent on the day to $US1.0240, a marked turnaround from Monday when it carved out an eight-month low of $US1.0116. Yields on 10-year cash bonds rose 7 basis points to 3.35 per cent.
The currency gained a quarter of a US cent after the RBA kept, as expected, its main cash rate at a record-matching low of 3.0 per cent, saying the impact of past cuts had yet to be fully felt.
Figures out earlier Tuesday suggested lower rates were indeed giving consumers the confidence to open their wallets with retail sales jumping 0.9 per cent in January, more than twice the gain forecast and the biggest increase in seven months.
Still, the RBA reiterated there was room to cut if needed given a benign outlook for inflation.
"It pays the RBA to be dovish, irrespective of whether it eases further, particularly given the global currency wars," summarises Paul Bloxham, Australia and New Zealand's chief economist at HSBC, forecasting a rate cut in Q4.
The RBA has slashed rates by 175 basis points since 2011, partly to offset the damaging impact of a strong currency in certain areas of the economy such as manufacturing.
Interbank futures slipped as investors pared back expectations on how far rates might yet fall. The August contract shed 0.095 points to 97.325, implying a rate of 2.675 per cent. Swaps implied 36 basis points of cuts over the next 12 months, down from 45 basis points early on Tuesday.
"The high Australian dollar is less of a problem because commodity prices have gone up a bit, but the level of the dollar is still a reason why a cut is on the table," said Matthew Johnson, a strategist at UBS.
Key resistance was found around $US1.0240 where stops were also cited by traders. Support was seen near $US1.0229, the 23.6 per cent retracement of the $US1.0599-$US1.0116 decline.
Other figures out in Australia showed that the long boom in mining investment was fuelling an expansion in resource exports with volumes up 3.4 per cent last quarter to A$US83 billion as the country shipped more iron ore and coal to Asia.
That also meant net exports added a solid 0.6 per centage point to economic growth in the quarter whose reading is due Wednesday.
Australian government bond futures ran into profit-taking following recent gains.
The three-year contract slipped 0.08 points to 97.230, while the 10-year contract eased 0.04 points to 96.715, leading to the flattening of the curve.
Earlier in the day, the long-end contract matched a one-month high of 96.760 set on Monday.
