The Reserve Bank of Australia made a Solomonic decision tonight lowering rates by 25bp to 3.00%. The RBA split the difference between Aussie bulls who anticipated no change whatsoever in the overnight rate and Aussie bears who forecast a larger 50bp cut. In commenting on their decision the board noted that , “There has already been a major change in both monetary and fiscal policy in Australia. Market and mortgage rates are at very low levels by historical standards and business loan rates are below recent averages, reducing debt-servicing burdens considerably. Nonetheless, the Board judged that there was scope for a further modest adjustment to the cash rate."

Compared to yesterday’s sharp moves in the currency and equity markets, trading has been relatively quiet. U.S. stocks meandered in and out of negative territory while the U.S. dollar traded higher against nearly all of the major currencies. Profit taking has hit the financial markets dragging equities and currencies lower. This consolidation gives investors the time to think about whether Monday’s rally is the beginning of a new bull market or just a strong bear market rally. Since March 6th, the S&P 500 has increased 23 percent, which is marginally less than some of the rebounds that we saw during the Great Depression. The point is that equities could still extend its gains while remaining in an overall downtrend.

On Tuesday, we said that being long dollars equals being long pessimism, but what is more relevant to recent price action is that being short dollars equals being long optimism. The U.S. dollar has sold off across the board following the Federal Reserve’s decision to buy U.S. Treasuries. Although the act of buying U.S. Treasuries is in of itself dollar bearish, the sell-off in the greenback also reflects the market’s confidence in the Fed’s actions. Given the trend of the U.S. economy, buying Treasuries was inevitable but rather than wait a few more months, the Federal Reserve decided to deliver the stimulus now and in turn give the U.S. economy its best chance at recovery.