AUD/USD and NZD/USD Fundamental Daily Forecast – RBA ‘Remains Committed to the 3-Year Yield Target’

The Australian Dollar extended its earlier losses after Australia’s central bank on Tuesday re-committed to keeping interest rates at historic lows as policymakers battle to stop surging bond yields from disrupting the country’s surprisingly strong economic recovery.

Concluding its March Board meeting, the Reserve Bank of Australia (RBA) kept rates at 0.1% and emphasized that its targets for employment and inflation were not likely to be met until 2024 at the earliest.

At 04:02 GMT, the AUD/USD is trading .7762, down 0.0011 or -0.15%.

RBA Responds to Surge in Three-Year Yields

The central bank has been struggling to deal with a steep selloff in global bond markets that saw local yields spike to two-year peaks in just a couple of sessions, according to Reuters.

“The savage move sent three-year yields as high as 0.188% and threatened to un-anchor them from the RBA’s target of 0.1%. The bank responded with an aggressive A$3 billion ($2.33 billion) bond buying offer last Friday, and followed up with another A$4 billion in Monday’s session.”

RBA Governor Lowe Reiterates Commitment to Target

“The Bank remains committed to the 3-year yield target and recently purchased bonds to support the target and will continue to do so as necessary,” said RBA Governor Philip Lowe.

“The Board remains committed to maintaining highly supportive monetary conditions until its goals are achieved.”

That helped three-year yields edge down a little to 0.14%, though the much more liquid futures market is still implying a yield of 0.265%.

Yields on 10-year bonds also went flying last week to reach as high as 1.973%, before easing back to the current 1.67%. The weekly increase of 43 basis points was the largest since 2001 and followed similar wild moves in U.S. Treasuries.

Short-Term Outlook

RBA officials are clearly upset by the speed of the shift in yields as it risked destabilizing markets. However, some of the rise in yields is justified given the improving economy.

Moving forward, the RBA is going to have to find a way to bridge the deepening divide between traders and the central bank over the pace of the economic recovery, but that could prove to be difficult given that Australia’s success in containing the coronavirus has allowed consumer spending to come roaring back from a lockdown-induced recession.

On Wednesday, a report is expected to show Australian gross domestic product (GDP) grew 2.5% in the December quarter, on top of a 3.3% jump the previous quarter. Housing prices are also climbing at their fastest pace in almost two decades.