Australian Dollar Plummets On Rate Decision

The Australian dollar dropped sharply against its U.S. counterpart Tuesday following strong gains Monday after the Reserve Bank of Australia (RBA) made a negative assessment of the economy. The bank kept rates on hold at 2.75 percent after unexpectedly cutting rates in April from 3.00 percent and keeping them on hold in May.

Scope For Easing
In the statement accompanying the rate decision, the RBA Board stated that there was "scope for further easing" should the economic outlook worsen. This spooked traders as the last time they made similar statements earlier this year, they proceeded to cut rates.

The RBA Board also noted that financial conditions in Australia improved recently as a result of proactive policy. The Board sees the current financial conditions as a platform for future growth as the economy is forced to diversify away from mining exports.

Inflation Outlook
Also weighing on the Aussie dollar were comments from the Board on the inflation outlook for Australia. The Board noted that the inflation outlook may provide some scope for further easing should it be required to support demand. They also added that the current policy (i.e. rate level) is appropriate given the inflation outlook.

However, the Board also noted that the Aussie dollar remains strong despite recent weakness in commodity prices. The drop in commodity prices in April has not yet abated and weighs on exports. Thus, the relative strength of the currency could imply that there is room for further devaluation and upside to inflation.

Technicals
Technically, the Aussie dollar gapped higher against the U.S. dollar on Monday from a low of 0.9637 to 0.9792. Tuesday, the currency "filled the gap" and retraced the entire move higher. Currently, the pair trades 0.9629, down 1.24 percent on the session.

Declines were not limited to those against the greenback. The Aussie dollar also fell similar amounts against the euro, the Swiss franc, and the British pound and less-so against the yen and the Canadian dollar.

Outlook
Australia's latest revision to first quarter GDP is due out overnight tonight and should be the next risk event for the currency. Economists surveyed by Bloomberg forecast that the economy grew 0.7 percent in the quarter and 2.7 percent on an annualized basis.