Is the Aussie priced correctly? RBA decision expected this week

by Apr 6, 2021Market Reviews

Is the Aussie priced correctly? RBA decision expected this week

Australia’s Interest rate Decision-day is this Thursday, 6 April. What will the RBA do with the rate, you ask? The consensus is that the rate will remain at 0.1%.

Inflation in Aussie is trending upwards, recovering from 2020 lockdowns, but was sitting at sub-1% last time I checked. The interest rate will most certainly not increase with inflation so low and lockdowns ongoing (Brisbane just completed a snap three-day lockdown last week).

RBA governor Philip Lowe has previously noted that 0.25% was the lower bound with which the bank was comfortable and thought effective. But unprecedented times called for unprecedented measures, and here we are, at 0.1%. In the upcoming announcement, could Mr. Lowe again revise the bank’s position on what is an effective rate, and scramble to lower the rate again? Is there any point in going to 0.075% or lower?

Rather than touch the interest rate, my best guess is that the RBA will increase the spending for asset purchases to AU$300 billion, up from the current AU$200 billion.

As we move closer to the RBA’s interest rate decision, a question I have is whether the market has priced in a potential increase in the RBA quantitative easing budget?

Let us take a look at some AUD pairs and the movements over the past few months for good measure.

 

AUDUSD

The AUD has weakened against the USD over the past few months. Some significant bearish candles occurred in late February to middle-March, leading into a price consolation in the range US$0.760. The big bearish tail that was rejected on April 1 possibly indicates there is some selling pressure lying dormant. The Interest rate announcement on Thursday might be a catalyst to provoke the AUD sellers again.

AUDUSD

 

EURAUD

The AUD has strengthened against the EUR all year. In March, indecision was rife in the pair, with bullish EUR sentiment testing higher prices against the AUD but not finding much support. Instead, the AUD claimed ground incrementally until late March, where some gains were erased with a reversal. By the end of last week’s trading, bullish EUR sentiment built some momentum but pushed too hard by the 31st. The AUD settled at 1.54425 per EUR after pulling back a touch with a nicely balanced candle last week.

EURAUD

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