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.
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.
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.
As predicted by many analysts, the Reserve Bank of Australia has slashed rates from 0.25% to 0.1%, a 15-point cut. Furthermore, they've decided to buy back over $100 Billion government bonds of maturities around 5 to 10 years over the next six months.
The Australian Dollar again, the U.S dollar was down slightly at 0.44%. The ASX 200 was up around 1.88% on the announcement.
The Bank stated they believe that the "economic recovery is underway and positive GDP growth is not expected in the September quarter" despite the restrictions in Victoria. They predict that GDP growth will be around 6% over the year to June 2021.
They believe that the employment rate is expected to be high – however, it may peak at around 8%, rather than the 10% expected previously. The RBA stated that they are "committed to doing what it can to support the creation of jobs."
This is the third time this year that interest rate has been cut. From 0.75% - 0.5%, 0.5% to 0.25% and now 0.25 to 0.1%.
Treasurer Josh Frydenberg stated that many families would benefit from the rate cut may be able to and lift the country out of a recession. He references someone with a $400,000 mortgage that may save around $1,000 a year from the 0.75% - 0.1% basis point cut. With that said, interest rates are relatively low, so the benefits may be negligible to many, considering the potential further costs of re-mortgaging.
Demand for housing may increase on the rate cut, possibly helping the Australian economy boost out of the current recession caused by the Coronavirus. However, some analysts predict that the RBA's cut will not increase demand as rates are at rock bottom. ANZ" s Banking Group Ltd CEO Shayne Elliot stated that "If homeowners don't want a mortgage at 2.5%, it's not clear to me they'll want one at 2.4%."
With the lockdown forcing many Australian Citizens to stay at home, the nation's saving ratio soared to a 46-year high to almost 20%. Furthermore, there is evidence from the RBA that credit card balances are being paid off faster. These are positive factors, which may push Australia out of the recession quicker once lockdowns and the Coronavirus are in the past.
Some analysts are not convinced the RBA is not doing enough. James McIntyre, Australia economist at Bloomberg Economics, stated, "with a sluggish demand outlook and a weaker labour market justifying further policy support, it is difficult for the RBA to make a case to hold back," insinuating he believes that the RBA must do more to push Australia out of the slump.
It is essential to keep an eye on the other side of the equation, the U.S dollar, as the election approaches less than a day. Trade safe!
We are 13 days away from the election. Many polls state that Biden is winning the votes – however that’s what happened in the 2016 election. With big banks citing a decline in the Dollar over a Biden win, what will happen to commodity currencies such as the Australian Dollar and the Canadian Dollar against the US Dollar?
The Australian Dollar against the US Dollar has had a strong comeback, up 30% from its March lows. This was due to Australian commodity prices such as copper, nickel, and iron rebounding as manufacturing restarted worldwide.
If Biden were to be re-elected, a risk to the Australian Dollar is his supposed $2 Trillion push for a greener future, pushing initiatives that would create the opportunity cost for using cheap power sources such as oil and coal as supposed to greener alternatives such as solar and wind, lower. A report by BloombergNEF showed that the “Levelized cost of electricity for onshore wind projects has fallen 9% to $44 megawatt-hour since the second half of last year… with solar [declining] 4% to $50 a megawatt-hour”. They also cite that prices are lower in countries such as the United States, China, and Brazil, and that “Best in class solar and wind projects will be pushing below $20 per megawatt-hour this side of 2030”. This is not good for commodity currencies such as the Australian Dollar and the Canadian Dollar, as they are notoriously known to sell off when green policies are enacted.
Therefore, it is likely that the Australian Dollar will sell off if Biden is elected. Given a predicted selloff too in a US dollar, we may see the pair make a violent move to the downside. Near the end of September, we saw a selloff in the pair, retesting that healthy 0.7 support level. The AUD/USD has been ranging ever since between the 0.7 and the 0.725 marks. However, a Biden win may see the currency pair down to 0.6925, a historically strong support/resistance level, and a full Fibonacci retracement from 0.74 to 0.6925.
Are you looking at the Australian Dollar?
The Australian Dollar has seen a strong bull rally - up 12% from its March lows. Now bulls are edging for the currency to push higher.
A possible push of the Australian dollar to 75c against the U.S dollar is a level not seen since May 2018. During that period where it first dipped below 75c, there were many retests in the following months before we finally saw a sold push below the 75c mark. This historical dynamic may require bulls to have strong momentum if they want to pass that 75c mark.
The Australian Dollar is noted for being a commodity currency – that is, the value of their currency against other currencies is mainly correlated from the price of commodities they export. You can see this correlation with the price of Iron and Copper.
That 12% push from its March low has been due to its largest export partner, China, seeing their demand for Australian resources sour amongst the Coronavirus pandemic and their souring relationship regarding barley and wine exports.
Australia’s Minister for Resources, Keith Pitt told the Financial Times in a recent interview that the mining and energy sectors were underpinning the domestic economy, which has been battered by a second wave of the Coronavirus that has forced many businesses in Melbourne to shut their doors for another couple of weeks. He also states that “62% of China’s Iron ore imports came from Australia in 2019-2020,” reiterating that commodity correlation.
However, more institutions are bullish on the Australian Dollar. Notably. Commonwealth Bank of Australia stated that “the recent rally in some commodity prices seem unstoppable,” hinting at the idea that commodity prices are an essential driver of the Australian Dollar.
It also helps that over the past couple of weeks; there has been a trend of de-dollarisation amongst traders and investors. This may be due to a mix of factors, including a 34% rally in Gold, unprecedented fiscal stimulus and quantitative easing, and a strong rally in U.S equities forcing investors and traders out of the U.S dollar.
If we continue to see strong demand for commodities such as Copper and Iron, we may see both the Australian Dollar and the prices for those rally in tandem together.
Speaking of Copper – a senior analyst here at BlackBull Markets, Anish Lal did an excellent technical overview video on whether copper will hit 80c – You can watch it here.