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Australian dollar spike ahead of RBA sparks new ASIC probe

Vesna PoljakSenior markets reporter

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Foreign exchange markets have again pre-empted the Reserve Bank of Australia's decision with the Australian dollar rising seconds before an RBA interest rates announcement, correctly foreseeing the outcome of the policy meeting and triggering the scrutiny of the securities regulator.

The Australian Securities and Investments Commission said it would look into Tuesday's trading. The currency was fetching US76.99¢ late in the session after adding around 1 per cent.

"ASIC confirms it will investigate a spike in the Australian dollar shortly before the Reserve Bank's monetary policy decision today," it said in a statement. "The investigation will look at trading in the dollar prior to the RBA's interest rate decision statement at 2.30pm.

"ASIC is also investigating foreign exchange movements shortly before the RBA's announcements in February and March 2015."

The RBA left the cash rate on hold on Tuesday at 2.25 per cent. Heading into the event, economists were almost evenly split but financial markets had priced in a strong probability the central bank would cut at the April meeting. The RBA did however maintain that further cuts were possible and that means rates could be lowered as soon as the May meeting.

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The Australian dollar's rally was in defiance of the Reserve Bank of Australia's formal easing bias, but experts are measured about the risk the RBA sets up a potentially painful period of currency appreciation as a consequence of its inaction.

Adding to the RBA's discomfort with the currency – it repeated that a lower value will be necessary to rebalance the economy – is growing evidence that the US experienced a tough first-quarter that could see the Federal Reserve staying at the 'zero bound' for longer.

June is regarded as a live meeting for the Fed but downgrades to US gross domestic product forecasts for the first-quarter and a weak jobs growth number for March could be enough to hold the Fed back from its so-called normalisation process and suppress the appreciation of the US dollar.

ANZ's top currency strategist Richard Yetsenga highlighted that the currency had only managed a mid-range value with the force of Friday's US payrolls miss and the RBA on-hold decision behind it.

"If you thought the Aussie might have some upside risk you've had the two key events occur which might have driven an upside move, weak US data in the form of payrolls, and the RBA has not cut rates," he said. "Since the beginning of February, Aussie traded between US75¢ and US80¢ and here we are at US77¢."

He said further big upward moves seemed "reasonably unlikely" and the currency would probably consolidate around similar levels.

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In light of the Reserve Bank of India's decision to keep rates unchanged at 7.5 per cent, also on Tuesday, central banks may be heading into a period of interest rate stability before the Fed fires with its highly anticipated move later this year. A quiet period for rates would follow an extraordinary January-February when around 30 policy moves were recorded, including €1.1 trillion ($1.56 trillion) in stimulus from the European Central Bank.

"That's entirely possible [that] we have come through a period where there's been a flurry of central bank activity along with continued speculation around when the Fed will hike," Mr Yetsenga said. Potentially, this could feed through to forex.

Meanwhile, the prospect of parity against the New Zealand dollar was scuppered for the time being after the two currencies came within 21 basis points of being square in the lead up to the RBA decision.

"There's plenty of reasons why the New Zealand dollar is much much stronger than the Australian dollar," said Commonwealth Bank of Australia's chief foreign exchange strategist Richard Grace. "We published some research a couple of months ago saying Aussie-Kiwi would go down to parity, it is currently in our forecasts to remain here for at least two quarters."

Mr Grace said the in-favour of the NZ dollar was a reflection of the "strong domestic demand present in the NZ economy".

Not all strategists place equal emphasis on the significance of headline events such as currency parity, or similar critical trading levels.

"The market's doing a lot of work around the number, that's potential options structures that may be present in the market around particular big figures but at the end of the day they're just psychological numbers really," Mr Grace said. In the retail market where the fees for trading are larger, the Australian dollar had already traded below parity with the Kiwi, he added.

"If you're a major investor, exporter or importer you need to transact. If you're transacting around those lows, that's neither here nor there," Mr Grace said. "The levels in terms of taking a weekly, monthly or annual view are still not going to change significantly if you're talking about 'we're within 21 basis points of a psychological level' type thing."

Senior markets reporter Email Vesna at vpoljak@afr.com.au

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