AUD/USD spikes as RBA rules out negative interest rates in Australia

The AUD/USD pair rose during the Asian session as traders reacted to the RBA minutes and a speech by Governor Philip Lowe. The pair is trading at 0.7022, which is a few pips below the June high of 0.7060. The Australian dollar rose by 0.20% against the kiwi, 0.10% against the sterling, and 0.18 against the euro.

AUD/USD reacts to RBA minutes

The Reserve Bank of Australia (RBA) released the minutes of the interest rate meeting held on July 7. In the minutes, the members deliberated about the state of the country’s economy and the likely response scenarios.

The members agreed to leave rates unchanged at 0.25% and to continue with their yield curve control program. In this program, the bank has put a target of 0.25% yield on the three-year government bonds. Like in Japan, it achieves this by buying as much government bonds as possible in the open market.

Further, the bank left the Term Funding Facility to support small and medium-sized businesses. Finally, it left the interest rate of 0.10% on exchange settlement balances held by financial institutions.

In the meeting, the members ruled that negative interest rates were “extraordinarily unlikely.” They also reaffirmed that there was no case for intervention in the foreign exchange market. Most importantly, unlike the Bank of England, they emphasized on the need to separate monetary policy from financing government practices.

They also “agreed that the Bank’s policy package was continuing to work broadly as expected. The package had helped to lower funding costs and stabilise financial conditions, and was supporting the economy.”

Australian economy challenges remain

The RBA interest rate decision came at a time when Australia’s economy was making steady progress. Recent data showed that retail sales jumped by 16.9% while the manufacturing and services PMIs rose to above 50. Also, the country reported a large trade surplus in June. Meanwhile, China, its biggest trading partner, also made progress, returning to growth in the second quarter.

However, this progress is facing a big test as the country battles the second wave of the virus. Earlier today, officials in Victoria and Melbourne reported 374 new cases and three deaths. The two states have also made it mandatory for people to wear masks.

Also, in a speech today, governor Philip Lowe warned that the economy remained in a precarious position. He said that the unemployment rate will continue to rise while incomes were likely to decline.  

“Notwithstanding this turnaround, the path ahead is expected to be bumpy and there are some major cross-currents in the labour market at the moment.”

In April and May, 870,000 people lost their jobs. Another 760,000 people in the country had no hours although they had a job.

AUD/USD technical outlook

The AUD/USD pair rose to an intraday high of 0.7031, which is a few pips below the June high of 0.7061. On the daily chart, the price is above the 50-day and 25-day Hull Moving Averages (HMA). It has also formed an ascending triangle pattern. Therefore, the price is likely to continue rising as bulls target the next resistance level at 0.7100. On the other hand, a move below 0.6923 will invalidate this trend. This price is at the intersection of the ascending trend line and the lowest point on July 10.