The AUD USD rose sharply overnight after the Reserve Bank of Australia unexpectedly hiked its key benchmark cash rate by a quarter-point to 4.75%. In its policy statement, the RBA cited inflation risks as the main reason behind the hike. It was the first rate increase since May 2010.
The news sent shorts scurrying for cover and encouraged aggressive buying that sent the Aussie closer to parity with the U.S. Dollar. Mortgage rates rose after the increase leading to speculation that pressure to hike further in the near-term would be reduced. This projection helped to temper the pace of the overnight gains, but did not attract any noticeable aggressive selling. It seems that parity is the natural resistance this morning.
Although the recent sharp rise to levels not seen for more than 20 years helped to keep inflationary pressures in check, the RBA still felt it needed to act at this time in light of the sharp rise in commodity prices. Before the central bank’s move, market participants had put a low probability on a rate hike.