For the second day in a row, the U.S. dollar has appreciated significantly against the Euro and is also trading higher against the New Zealand dollar and Swiss Franc. However, the extent of today’s rally in the greenback basically ends there. The dollar is practically unchanged against the British pound and Australian dollars and is trading lower against the Canadian dollar and Japanese Yen. The 2.3 percent sell-off in U.S. equities coupled with the outperformance of the two lowest yielding G7 currencies indicates that risk aversion is the dominant theme. Yet, with no major U.S. economic data or market moving news over the past 48 hours, traders may be wondering, what changed. As recently as last week, investors were optimistic about a turnaround in the global economy following the more substantial outcome from the G20 meeting.

High beta currencies continued their correction on the second night of trade this week following equities lower as both the dollar and the yen strengthened mildly in a relatively quiet Tuesday session. With economic calendar once again barren trading was dominated by central bank news with both BOJ and RBA announcing rate decisions tonight.

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."

Over the past week, the Australian dollar staged an impressive rally as upside surprises in economic data fueled expectations that interest rates will be left unchanged for the second time in a row. Since March 10th, the Australian dollar has appreciated from a low of 0.6340 to an intraday high of 0.7228 on Friday. The Reserve Bank of Australia has a monetary policy meeting on Monday evening NY time, Tuesday morning in Sydney and the outcome of the meeting will determine whether the Australian dollar is able to sustain its gains. Currently, the market expects the RBA to leave interest rates unchanged, but some people believe that the RBA could cut rates by as much as 50bp, which means the upcoming rate decision, could be a close one. Although, leaving interest rates unchanged has become a common practice of many central banks these days, what sets Australia apart is that interest rates are not at zero, leaving the RBA with room to ease. At 3.25 percent, the country currently has the highest interest rate amongst developed countries.

The minutes from the latest Reserve Bank of Australia policy meeting suggested that further rate cuts may be coming. Although RBA board noted that “monetary and fiscal stimulus that had been applied to the economy was having an expansionary effect,” the Australian monetary officials noted that the economic benefits from the massive rate cuts “remained unclear”.

Both euro and pound recovered off their North American session lows in a quiet rangebound session that carried very little event risk on the calendar. However, the star of the show in currency market tonight was the Australian dollar which singlehandedly revived risk appetite after the RBA surprised traders by keeping its overnight cash rate at 3.25% instead lowering it by 25bp as expected.

It has been a rough day in the financial markets with the Dow Jones Industrial Average and S&P 500 falling to the lowest level in 12 years.

As expected the RBA lowered rates by 100bp taking the yield to 3.25%. The easing took the cash rate to its lowest level since the RBA adopted it as a policy target in 1990. The last time overnight money market rates were this low was in the early 1960s. Although the RBA cited deteriorating global economic conditions as the reason for its move, it made no reference to possible further cuts in March.

There are 3 interest rate decisions on the calendar this week from Australia, the United Kingdom and the Eurozone. Only 2 out of the 3 countries are expected to cut interest rates but all 3 rate decisions and the corresponding comments from central bank officials should trigger some volatility in the currency market. Although the amount of easing is important, what will receive more attention are the comments on how much further these central banks could cut interest rates. The upcoming rate cut is not expected to be the last for the Reserve Bank of Australia or the Bank of England and the expectation of further rate cuts could prevent a major recovery in the Australian dollar and British pound.

The dramatic intraday rally in the US equities has helped many currency pairs recover their earlier losses. After having sold off to a 7 week low against the US dollar, the Euro managed to end the US trading session in positive territory. The prospect of interest rates remaining unchanged on Thursday is helping the EUR/USD outperform its peers. Other currency pairs were not lucky enough to turn positive like the Euro, but they are still well off their lows. The rebound may suggest that risk appetite is improving, but given that risk appetite can change as quickly as teenage trends these days, it remains to be seen whether the recovery will last. More layoffs have been announced adding to more significant job losses in the first few months of the year. Macy’s announced that they will be reducing their workforce by 7,000 employees and unfortunately there is talk that Morgan Stanley and Goldman Sachs are considering a second round of layoffs. Non-farm payrolls are due for release on Friday and announcements such as these could lead to a resumption of risk aversion ahead of the report.