Australian dollar holds tight range ahead of RBA bond tapering decision

SYDNEY: The Australian dollar traded sideways on Tuesday, as investors awaited a key central bank decision at which it is expected to announce whether it will delay an earlier decision to start tapering bond purchases.

The currency advanced as much as 0.2% to $0.7456, before falling to be unchanged, ahead of the central bank decision.

If the Reserve Bank of Australia (RBA) sticks to its plans to taper bond purchases even as the economy struggles with the fallout of lockdowns in various states, the Aussie could temporarily jump higher, analysts said.

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The Australian economy is expected to contract in the third quarter due to strict COVID-19 lockdowns, with a double-dip recession possible if 70% of its population are not fully inoculated by early November, a condition for reopening the economy.

"A lot has changed over the past month. The COVID outbreaks have worsened," Australia and New Zealand Banking Group analysts, who expect the RBA to reverse its tapering decision, said in a client note.

"Infections among the unvaccinated will surge after the lockdowns end. Therefore, there will be a significant period of adjustment to 'living with COVID' (which) suggests the Australian economy will not likely bounce back as quickly and sharply as last year."

JPMorgan strategists, however, note a strong labour market in Australia and bond tapering plans by other central banks, including the US Federal Reserve, will convince the RBA to continue its plan to lower asset purchases.

Across the Tasman sea, the New Zealand dollar was only 0.06% higher at $0.7134, but still hovering around a recent multi-month high of $0.7170, as the country appeared to have had some success in containing a recent COVID-19 outbreak.

On Tuesday, local infections in New Zealand rose very slightly, ahead of the relaxing of restrictions in all regions outside Auckland, its largest city.

Bond prices were lower, pushing New Zealand bond yields about 3 basis points higher at the short-end of the curve, and 2 basis points at the longer end.

Yields on Australia's 10-year paper were stable at 1.268%, while 3-year yields were three basis points higher at 0.320%.