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Australian dollar rallies as RBA keeps rates steady at 2.0%

The Australian dollar rallied on Tuesday after the Reserve Bank of Australia (RBA) surprised some by tempering its call for a lower currency, triggering a swift short squeeze.

The Australian dollar gained nearly 1 percent to a peak of $0.7356, pulling away from a six-year trough of $0.7234 set last week. It was last at $0.7349 with resistance around $0.7367, the 76.4 percent retracement of the June-July move.

The RBA said the Aussie was adjusting to significant declines in key commodity prices, but dropped a reference to further falls as being both likely and necessary.

"It suggests that maybe (the Aussie) is closer to appropriate levels," aid Su-Lin Ong, a senior economist at RBC Capital Markets. "The fact that they have toned (it) down suggests that the easing bias, which was already pretty modest, is very mild."

"Part of the rationale around having an easing bias and threatening to cut, is to get your currency lower," she added.

The central bank kept rates at 2 percent after cutting them to all-time lows in May, saying policy needed to be stimulative given sub-par economic growth.

RBA Governor Glenn Stevens has recently sounded reluctant to cut again as he balances the need to underpin a sluggish economy against the risk of over stimulating an already hot housing market.

A Reuters poll of 21 analysts had found all but one expected a steady outcome this week and only six looked for another easing over time.

The central bank has already eased twice this year as the unwinding of a once-in-a-century mining boom hammered business investment and national income.

The baleful impact of falling commodity prices was all too evident in monthly trade figures out on Tuesday. The deficit widened to 2.9 billion Australian dollars in June, bringing the shortfall for the whole second quarter to an eye-popping 9.9 billion Australian dollars.

The lowest rates in memory have been supporting consumer demand for goods, services and housing. Figures form the Australian Bureau of Statistics out on Tuesday showed retail sales outpaced forecasts with a rise of 0.7 percent in June.

Sales for the second quarter also beat expectations with an inflation-adjusted increase of 0.8 percent, thanks in large part to the spillovers from a booming housing market.

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Home building has been on a tear for months and looks set to remain strong for some time to come with approvals to build new property near all-time highs. Red-hot demand has sent home prices through the roof with Sydney boasting annual gains of more than 18 percent and Melbourne over 11 percent.

The total value of housing has climbed half a trillion dollars in the past 12 months to reach A$6 trillion, making home owners feel wealthier. However, a sustained surge in borrowing for property investment has not been nearly so welcome.

Regulators have clamped down on lending by banks forcing them to jack up mortgage rates for investment properties while increasing the required deposits for loans.

Just last month, RBA's Stevens cautioned that yet lower rates might backfire if they encouraged an upward spiral in borrowing that ultimately led to a bust in home prices.

Market pricing now implies around a 60 percent chance of a rates move by December, compared to 72 percent earlier in the day.

Bearish investors, who had already been shaken by solid domestic retail sales figures earlier in the day, were forced out of Aussie short positions after Tuesday's rate call.

The New Zealand dollar trimmed losses to $0.6568, not far from $0.6535 touched last week and remained vulnerable.

ANZ Bank's commodity price index slumped 11.2 percent in July, a record monthly fall that took it to the lowest level in nearly six years. In New Zealand dollar terms, the index was down 6.7 percent even though the currency fell 4 percent from June.

"The sizable fall in NZ dollar prices tells us that the NZ dollar is not moving fast enough in response to shifts across commodities," said ANZ agri-economist Con Williams.