SYDNEY, Nov 2 (Reuters) - The Australian dollar fell on Tuesday after the central bank dropped a commitment to keep yields on its April 2024 target bond at 0.1%, signalling an earlier than previously expected rise in cash rates.
The move, which also drove gains in short-term bonds and dragged the New Zealand dollar slightly lower, shows the market was betting on a higher concession from the dovish central bank, strategists said.
The Aussie was 0.25% lower at $0.75 shortly after the Reserve Bank of Australia's monetary policy statement, well within its two-week range.
The kiwi also moved 0.1% lower to $0.7172.
The RBA said the decision to discontinue the yield target reflected an improvement in the Australian economy and the recent surprisingly high reading for third-quarter inflation.
It would, however, continue to buy government bonds at a pace of A$4 billion ($3.00 billion) a week until at least mid-2022 and emphasised that inflation was still too low.
The central bank had already given up any pretence of defending the bond target as yields flew to 0.73% after the market suffered one of its worst monthly drubbings in decades.
"The market was pricing way more," said GSFM investment strategist Stephen Miller said.
"It's the minimum possible removal of monetary accommodation in the wake of last week's inflation numbers. It's not an abrupt change tack from the RBA at all."
Bond markets moved higher following the RBA's statement, particularly in the front end of the curve. Australian 3-year benchmark bond yields were 6 basis points lower at 0.98%, compared with its recent 1.267% high on Oct. 29.
Australian 10-year bonds also pared back earlier losses to push yields to 1.958%, compared with 1.49% a month ago.
"The Board is prepared to be patient, with the central forecast being for underlying inflation to be no higher than 2.5% at the end of 2023 and for only a gradual increase in wages growth," Governor Philip Lowe said in the brief statement.
(Editing by Jacqueline Wong)
