AUD Risk Ahead: RBA to Cut Interest Rates?
This week is arguably the biggest of the year for AUD.
Stealing the limelight will be the US Presidential election on Tuesday; given the pandemic, a significantly higher percentage of votes have been cast early, meaning that as votes are counted it might not be immediately clear on Tuesday night who the winner of the election is.
As far as AUD is concerned, a Biden victory is the best possible outcome, given that he is likely to de-escalate the US/China trade war, which ought to benefit Chinese growth, which ought to pass through into stronger demand for Australian commodity exports.
One could make a strong argument for AUDUSD to retest October highs of the mid-0.7200s if this outcome happened. AUDUSD currently trades just above 0.7000, having been pressured in recent weeks in tandem with downside in global equities amid the resurgence of the virus and Europe going back into lockdown. Conversely, a surprise Trump would almost certainly knock AUDUSD back below the 0.7000.
But before the election results start coming in (in the early hours of Wednesday morning, London time), we have the most important RBA meeting in months coming up tonight. We also have important retail sales and trade data (both for September) coming up.
RBA signal incoming easing
Back in September, RBA Deputy Governor Debelle surprised markets by revealing that the RBA is looking at further monetary stimulus options such as bond buying further out along the curve, at potential FX intervention and at the possibility of lowering rates, potentially even into negative territory.
At its October 6th meeting, the RBA held fire on policy changes (likely because it wanted to wait to see the Australian Government’s budget that was set to be released a few days later), but sent similar signals about how it was eyeing further easing measures.
RBA Governor Lowe set things in stone in the eyes of the market in an October 14th speech where he said that its reasonable to expect that further monetary easing would get more traction that was the case earlier and that the RBA are considering what more can be done to support the recovery.
RBA to cut rates, increase QE
Given the above, the RBA is thus expected to axe its key lending rate and its 3-year government bond yield target to 0.1% tonight, while most analysts are also calling for the RBA to increase the size of its QE programme; TD Securities think the RBA will introduce a new AUD 100bln programme specifically targeted at the purchase of 5-10year bonds, while Wells Fargo expect the new QE programme to be worth some AUD 75bln
Discontent with the speed of the recovery appears to be the driving motivation behind the RBA’s move towards further stimulus; recent data has been mixed, with the Australian economy suffering a knock in September, as shown in labour market and retail sales data (likely exacerbated by lockdown in Victoria). However, Victoria has since come out of lockdown, the virus remains broadly well contained and demand for Australian products from China is strong, assisting the Aussie recovery.
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