On Tuesday, as widely expected, the RBA cut the official cash rate by 0.25% down to a record low of 2%. In the day or so since, the Australian markets haven’t exactly been following the script as written by the RBA.
Interest rate cut normally equals a rally in equities and fall in currency. The ASX200 index on Wednesday dropped 134 pts or 2.4% to its lowest level since early February. The Australian dollar (AUD/USD) has rallied strongly from the key 0.7850 level up towards 0.80 again. This is of course, a long way away and in the opposite direction from where the RBA ideally wish to have the AUD/USD. In its statement on Tuesday, the RBA said, “Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices.”
Tomorrow, Friday 8th May, the RBA releases its Statement on Monetary Policy. Many are suggesting that the reason why the AUD/USD has rallied so strongly is some key words were missing from the statement on Tuesday, which were present in previous months’ notes. They are the three words “further easing ahead”. All eyes will be on whether they reappear in the statement tomorrow.