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”.

Yen was the star performer in overnight trade gaining more than three big figures from yesterday on repatriation flows ahead of the Japanese fiscal year end. After trading as high as 99.12 just two days ago USD/JPY fell to a low of 95.67 in early European session on rumors of large bond redemptions that drove EUR/JPY lower by nearly 300 points and dragged EUR/USD down all night long.

Australian unemployment hit a four year high reaching 5.2% versus estimates of 5% but surprisingly the country’s economy continued to generate jobs adding 1800 new workers versus forecasts of -20,000 loss. The labor participation rate also improved rising to 65.5% from 65.3%.

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.

The Australian Dollar has been trading in a very tight range over the past few weeks and is prime for a breakout.

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.