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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

This week ahead: Interest Rate Decisions, GDP

We have a relatively fair number of economic events this week ahead. However, they are relatively significant in their effect on the financial markets and further fundamental guidance.

We've seen risk-on in currency markets recently, with many pairs against the U.S Dollar rallying on confidence that the economy will fare better in 2021. GBP/USD. Broke 1.40, while NZD/USD and AUD/USD both broke 0.78 and 0.73, respectively. Oil has been rallying on supply restriction due to middle east tensions and the snowstorm currently taking over Texas. Here is your week ahead.

Monday, 22nd February – People's Republic of China's Interest Rate Decision

PBoC's 1-Year Interest Rate Decision

With China stomping the virus faster than any country, their road to recovery has been patchy. With a couple of flare-ups in community transmission similar to that of New Zealand, China acted swiftly to secure the cases, ready emergency and hospital units, and shut the Coronavirus. With their economic recovery fully underway, Yi Gang has stated that China's central will not "prematurely" exit from its supportive monetary policies. "Looking forward, I think our monetary policy will continue" and that "we will keep a delicate balance between supporting the economic recovery, at the same time, preventing risk."

With the strength and the interest in the Chinese Yuan skyrocketing in 2020, the PBOC will introduce some measures to bring down the Yuan's strength as it is fundamental to their exports. With that said, analysts predict the PBOC to lower the headline 1-year rate from 3.85%.

Monday, 22nd February and Wednesday, 24th February – NZ Retail Sales & Reserve Bank of New Zealand

RBNZ's Interest Rate Decisions

With strict lockdowns imposed earlier in 2020, New Zealand has stomped the virus, China has, and life for its citizens has returned to a relative normal. With a flare-up in Auckland's community cases last week, Auckland was put in a snap lockdown for three days for the government to assess the situation. They had come out of that lockdown after the three days but still face social distancing and capacity constraints in level 2.

However, with the domestic economy has been in full swing before the snap lockdown, analysts predict retail sales to stay healthy at 26.7% growth, slightly lower from the 28% growth the previous quarter.

REINZ Housing Report January 2021

Regarding the RBNZ's interest rate decision, the mandate for the central bank of New Zealand is like many other central banks: Employment and Price Stability. A mandate they do not have is the control of house prices. However, with house prices skyrocketing almost 20% the past year, there has been pressure from politicians and analysts for the RBNZ to implement pricing controls.

The bank has reinstated loan-to-value ratios from first home buyers and investors, requiring investors to front up 40% of the house price as a deposit when purchasing a house, stating that the initial removal of LVR's has done its job.

The initial optimism on negative rates has subsided on the New Zealand economy's incredible bounce bank. Many banks are now rescinding their calls on negative rates, with banks such as ANZ calling a 15-basis point cut from 0.25% to 0.1%. ANZ's economists stated that "If the housing market and domestic economy maintains momentum well into autumn, the RBNZ will not cut again at all." However, they further stated that "If Covid-19 returns to our shores in a significant way, a negative OCR will once more be game on."

Tuesday, 23rd February – U.K's Unemployment Rate

United Kingdom's vaccination program is leading the charge for their recovery. With their seven-day average way down from all-time highs, the start of the recovery is near for the United Kingdom. Nearly 18 million people in the United Kingdom had received at least one Coronavirus Vaccine dose, around 27 doses per 100 people. These were aimed at citizens aged 70 and higher, alongside healthcare workers, who have accounted for 88% of the United Kingdom's Coronavirus deaths. Analysts predict
the 3-month rolling unemployment rate to rise slightly from 5% to 5.1% this week ahead.

Thursday, 25th February – U.S' GDP 4th Quarter

Like that of the United Kingdom, the vaccine has led the charge for the recovery in the United States. Seven-day averages are nearly three months now, with over 61 million doses of the vaccine, or around 18.6 doses per 100 people. With Jerome Powell continuing to pledge his unwavering support for the American economy, alongside an optimistic 1.9 trillion-dollar stimulus, the potential for a rebound in the U.S economy may be on its way. Analysts predict a slight nudge higher in GDP growth at the end of the 4th quarter, up 0.1% to 4.1%, compared to 4% in the previous quarter.

A light week ahead events-wise. However, the events are heavy. Stay say, and trade safe.

NZD/AUD – Battle Of The Interest Rates

NZD/AUD is approaching a robust congested area at around 0.925. A downwards channel sees a possible move further lower may see the pair come a level below 0.9. However, an action lower will be dictated on which economy puts the brakes on monetary stimulus first.

NZD/USD Looking To Test That Support At 0.925

NZD/USD - Monetary policy dictated by the state of the economy

During the peak of the Coronavirus, the best method of suppressing the virus was not evident. This is where Australia and New Zealand's strategies diverged.

Australia went for a loose lockdown, allowing citizens to roam freely without restricting them to their houses. They did enforce social distancing laws alongside mask-wearing.

New Zealand went for a strict lockdown, only allowing citizens to leave their house to exercise, get groceries and go to the doctors. Essential workers were given a pass to go to work.

It became evident as to what method was more successful. There were critics initially questioning New Zealand's method, pointing to the likes of Australia and Japan, who were getting similar results to New Zealand per capita, however, without the devastating economic cost of a lockdown. Those critics were soon to be silenced after New Zealand slowly pulled out their nearly six-week lockdown, well on their way to recovery. On the other hand, Australia had a devastating second wave that forced the inevitable – a strict lockdown. However, by then, New Zealand was back open and running.

With a head start in Australia's economic recovery, New Zealand has been showing signs of slowing its fiscal and monetary policy measures. Recently, The Reserve Bank of New Zealand (RBNZ) re-instated policies regarding mortgages issued by banks, which require house investors to front up 40% of the house sale price if they want to purchase a house. These were temporarily removed during the peak of the Coronavirus in 2020 to stimulate the economy. However, they were placed back after the national median price jumped up to $730,000, up 19.3%.

However, a country that is heavily dependant on tourism is struggling due to the strict border controls. Westpac analysts predict New Zealand's GDP to fall 0.7 over the six months to March due to the lack of tourists. Dominick Stephens stated that "tourism is highly seasonal, and there is normally a strong net inflow of people into the country in the summer months. The absence of visitors was felt keenly in the December quarter, and will be even more so in the March quarter, which would have otherwise been the peak tourist season."

Australia Closing In On New Zealand Coronavirus Lead

Australia has not had a good time dealing with the Coronavirus. Outsourcing security of their quarantine to a private company did not end well, with the spread of the virus being exacerbated by the security guards sleeping with the Coronavirus guests. This, alongside lax state line restrictions, pushed Coronavirus cases up, forcing two lockdowns. However, there is some optimism in the Australian economy, with many of their commodities' prices reaching all-time highs. Furthermore, the Reserve Bank of Australia stating that the "recovery in the second half of 2020 had been faster than initially expected."

I believe the economy that starts tapering monetary policy programs will first see their currency strengthen against the other. With the RBA stating that they are "committed to doing what it reasonably could to support the Australian economy" and that "significant monetary support would be required for some time," it looks like New Zealand in the mid to long term will be raising rates before Australia will, given the actions they took with loan-to-value ratios, alongside the consistent recovery from the Coronavirus.

This week ahead: CPI, NFP & RBA Interest Rate Decision

As Europe enters into the late stages of their respective lockdowns, it looks like the Coronavirus story may be starting to reach its end. Worldwide cases have started to plateau, with only a couple of countries where the Coronavirus cases continue to rise. For example, the United States broke the grim record of 200,000 cases per day, and Brazil's cases continue to increase. This week ahead contains a plethora of data releases from various countries, so stay tuned.

Eyes on Governor Lowe of the RBA on the banks' Interest Rate decision this week ahead

Monday, 30th November – China Non-Manufacturing PMI

After essentially stamping out the virus, China continues to excel in its recovery. For the right part of 6 months, China's Coronavirus cases have stayed relatively flat, showing their strict Coronavirus strategy's effectiveness. While their politics has remained relatively tame, geopolitical pressures with other countries have started to simmer, most notably with Australia. China recently slapped Australia with a 200% tax on Australian wine as Australia ramps its probe on where the Coronavirus originated in China. This is on top of tariffs on beef, coal, barley, seafood, sugar, and timber. China's PMI's are expected to drop to 52.1 from 56.2 the month before.

Monday, 30th November – Germany CPI

Merkel's summary of Germany's near future portrays how the Coronavirus has played out in Germany in the past couple of weeks. She stated, "We're in for a tough winter, but it will come to an end.,.. My wish for us all is that we act responsibly and stand up for each other." Coronavirus cases in Germany, like many in countries in Europe, have skyrocketed. A premature de-restriction in lockdown measures, alongside summer travel, have pushed Coronavirus cases further higher. That said, analysts predict no change in CPI growth, with a predicted figure of -0.5%.

Monday 30th November, Tuesday 1st December and Thursday 3rd December - ECB Lagarde Speech, Europe CPI and Retail Sales

With the ECB offering over 1.8 Trillion euros of Stimulus alongside 0% interest rates to help support the European Union, the central bank is looking for additional ways to push the bloc out of the recession. The ECB President, Christine Lagarde, continues to stress that the bank's role is to ensure that "the financing conditions are stable, and are conducive to economic recovery is it comes." With two consecutive speeches, traders and investors should watch out for wild whipsaws in the Euro this week. Furthermore, the European Union is set to release the CPI figures this week, with analysts predict the CPI to fall at a slower rate at 0.2%, as suppose to 0.3% the month before

Tuesday 1st, Wednesday 2nd, and Friday 4th December – RBA Interest rate Decision, Governor Lowe Speech, and Retail Sales

The Reserve Bank of Australia has pumped over 100 Billion Australian Dollars into the Australian economy. So far, it seems like it's been working, signaled by dampened currency appreciation and lower bond yields. Analysts predict that the Australian dollar will outperform the New Zealand dollar, with Martin Whetton, head of fixed income and currency strategy, and Commonwealth Bank of Australia stating that "New Zealand exports are more exposed to the U.K., the eurozone and the U.S. than Australia,." With the recent success Australia has been having to the Coronavirus, alongside positive responses from the quantitative easing the RBA has been implementing, analysts predict the RBA will keep rates as is at 0.1%. Retail sales are also going to be released this week ahead.

Tuesday 1st, Wednesday 2nd, and Friday 4th December – U.S. ISMs, Fed Powell speak, and NFP

As the President's transition from Donald Trump to Joe Biden gets underway, this week ahead will be a busy week regarding the data coming out from the United States. With Coronavirus cases continuing to rise with no end in sight, analysts predict a drop in the U.S. ISMs from 59.3 to 57.5. NFP figures are also coming out this week ahead, with analysts predicting a decline from 638k last month to 520k this month. Furthermore, expect Chairman of the Fed, Jerome Powell, to reiterate his support for the United States economy.

A lot of data coming out this week. Stay safe, Trade safe.

Week ahead - Central Bank speeches, CPI's

This week is relatively light regarding data coming out from countries. However, investors and traders will be focusing on one essential item – clarification on the Pfizer vaccine's efficacy and timeline. Anthony Fauci stated that the Pfizer vaccine has an "extraordinarily high degree of efficacy – more than 90%, close to 95%" and that the U.S. may begin offering the vaccine to priority groups at the end of December. This hope of a vaccine before year-end boosted risk on sentiment last week. But further clarification of the vaccine's timeline may solidify its move upwards, not to mention an additional step back to normalcy in the world.

Let's hope that the vaccine comes sooner rather than later, so we can focus on rebuilding the economy instead of listing deaths like a statistic. Here is your week ahead.

Coronavirus Cases continue to rise around the world.

Wednesday, 18th November – U.S. Retail Sales

As we put the U.S. election behind us, traders and investors' focus starts turning to the U.S. economy's health. Dubbed as the backbone of the economy, the United States consumer helped lift the economy pre-Coronavirus, helping support equities with higher valuations. The balance between households who were able to save their incomes due to lockdown and the households who could not keep their jobs became the critical question of whether the consumer will become the backbone of the United States recovery. However, with stimulus checks slowly drying up, alongside the Coronavirus worsening in the United States, analysts predict U.S. retail sales growth to slow around 0.5%.

Wednesday, 18th November – Speech form the Governor of the RBA, BoE, and the BoC

Australia
After beating a brutal second wave, Australia is on its way to a long and grueling recovery. Further supporting the recovery is the RBA cutting its interest rate from 0.25% to 0.1%. Analysts will be focusing on Governor Philip Lowe and his explanation on implementing lower rates and whether it will translate to lower retail rates. This contrasts with how New Zealand's implementation of lower rates in which they released a new tool to enable banks to lend at rates near the interest rates. AMP Capital Chief Economist Shane Oliver stated that he expects Governor Lowe to reiterate the Australian Economic Recovery as "bumpy and uneven" and that the bank stands ready to do more.

United Kingdom
There seems to be some relief with the Coronavirus situation in the United Kingdom, as the death toll is slowing. However, deaths were at around 170 in the previous couple of days, showing that the Coronavirus grapples with the struggling country. The Bank of England recently held interest rates at 0.1%. However, they decided to expand its target stock of asset purchases to around $1.2 Trillion U.S. Dollars. Vivek Paul, U.K Chief Investment Strategist at BlackRock Investment Institute\, stated that "For an economy with the headwinds of rising Covid rates, a national lockdown. And a still-uncertain outlook on Brexit, a strong monetary and fiscal policy response is essential."

Canada
Canada continues to rack up Coronavirus cases with no end in sight. Canada recorded around 5,500 new cases, an all-time high, with Dr. Theresa Tam, Canada's top doctor stating that Canada is on track for 10,000 daily Coronavirus cases if Canada is unable to rein-in the Coronavirus resurgence in the coming weeks. Dr. Tam states "Fires are burning in so many different areas and now is the time to get those under control." The Senior Deputy Governor of the Bank of Canada, Carolyn Wilkins, stated that the Coronavirus's economic "scars" could be permanent without a concerted effort from all Canadians. Canada is also set to release CPI figures year over year for October the day after, with a market consensus of a slight decrease in the growth of the CPI to 0.9%.

Thursday, 19th November – Australia's Employment and Unemployment Rates

As Australia slowly opens up their businesses alongside Australia and New Zealand borders, businesses in Australia slowly grapple with a decrease in foot traffic alongside compliance with certain Coronavirus restrictions. With women primarily bearing the brunt of job losses in the early part of Australia's recession, Shadow Minister for Future Work, Clare O'Neil stating that "a tsunami is coming for workers in predominantly male industries" Australia is set to see a 30,000 decline in employment, alongside an increase in the unemployment rate to 7.2% from 6.9% last month.

Friday, 20th November – PboC's Interest Rate decision

China has been reluctant to implement significant monetary policy changes this past year, even during the Coronavirus pandemic, opting for quantitative easing and stimulus instead. As China is relatively ahead of its recovery compared to other countries, it is seen as the first to likely exit its emergency programs, potentially increasing the offshore Yuan. However, if there were a perfect time to cut rates, it would be now as China would be better positioned to take advantage of lower rates, propelling China's recovery. My theory is that the PBoC surprisingly cuts rates this week ahead.

Eyes on the vaccine this week ahead. Stay safe and Trade safe.

RBA Slashes rates to 0.1%

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.

Interest Rates Slashed to 0.1%
AUD/USD down 0.44% on the news

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.

Reserve Bank of Australia less dovish on the future of the Economy

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.

Low rates may be welcome for the housing market of Australia

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!

Is the future for the Australian dollar downwards?

AUD/USD has been a strong performer in the currency markets, returning just under 30% since its March lows. We talked about how the Australian dollar was poised for a rally on a market recovery earlier this year.

Australian Dollar selling off in the past couple of days

The market has recovered, and the Australian dollar has recovered with it. This was due to the Australian dollar being mainly a "commodity currency," with manufacturing worldwide slowly starting to pick up, specifically in China. Erik Nelson from Wells Fargo stated that "If you consider some of the fundamentals in Australia, you can justify the valuation of the Australian dollar at current levels" and that Australia is "very well positioned right now" about its exports to China.

However, the AUD/USD has fallen over 3% in the past couple of days. This has been on a multitude of factors, the US Dollar strengthening on Donald Trump's recovery, recent weakness in the oil prices, and the tremulous Coronavirus situation in Australia have pushed the Aussie lower.

Is this a long term trend for the Australian dollar, or just Market Volatility?

Yesterday, the RBA left rates at 0.25%, which it has been since the initial rate cut in March. RBA's Governor Philip Lowe stated that the decision was based on the uneven recovery of the global economy due to the Coronavirus – "The global economy is gradually recovering after a server contraction due to the pandemic. However, the recovery is uneven and its continuation is dependent on the containment of the virus".

Analysts are predicting a rate cut in the next six months. However, there is little chance for rates to fall into the negative as Governor Lowe historically has been against negative rates, citing that they are "extraordinarily unlikely in Australia" due to the documented downsides on consumption sentiment.

Furthermore, Australia has been able to control its second outbreak in the state of Victoria, enabling them to focus on the path to recovery from the Coronavirus. The RBA also stated that "Labour market conditions have improved somewhat over the past few months and the unemployment rate is likely to peak at a lower rate than expected"

With elections coming up in the United States, the Trans-Tasman bubble between New Zealand and Australia coming to fruition, and Australia slowly recovering, market volatility may affect the AUD/USD pair, rather than a long term trend. I believe the Australian dollar's tailwinds are a lot stronger the potential headwinds it may face.

Anish Lal has some excellent analysis on the recent market drop due to Trump's tweet - you can watch it here.

Nonfarm Payroll, RBA Interest rates - Week ahead

Busy week ahead as September kicks in. As New Zealand and the United States elections slowly approach, the Coronavirus pandemic will most likely be the center focus for many parties and how they handle the post Coronavirus world. Here is your week ahead.

Nonfarm payroll this week ahead.

Tuesday, 1st September – Germany's Inflation and Unemployment rate

Like most of Europe, Germany is experiencing an uptick in cases as a reopening of Europe too early takes its toll. However, this has not stopped protesters storming the German Government building in Berlin alongside Germany's total cases ticked over 243,000. With prices of oil slowly increasing, analysts expect inflation to increase slightly by 0.1%. Furthermore, with Germany's unemployment benefit allowing unemployed citizens to claim up to 67% of their previous wage, analysts predict no change in the unemployment rate at 6.4% in the week ahead.

Tuesday, 1st September and Wednesday 2nd September – Reserve bank of Australia Interest Rate Decision and Australia's Year over Year GDP.

Australia continues to fight a hard battle with the Coronavirus, after their original strategy of having no lockdown has lead to massive spikes in Melbourne, Victoria. Australia recorded 123 new cases of the Coronavirus – all in the state of Victoria. Denita Wawn, Master Builders Australia's Chief Executive, stated that "Our industry is facing a blood bath… Private sector investment is evaporating, and the government must step in to save businesses and jobs," conveying how dire the situation is in Australia. However, the Reverse Bank of Australia is expected to hold interest rates at 0.25%. Any deviation from this consensus is most likely to move the Australian dollar significantly. Furthermore, Melbourne's sustained lockdown has seen forecasts of GDP growth to drop to -5.3%, down 6.7% GDP growth of 1.4% in the previous quarter.

Tuesday 1st September – Italy's Markit PMI.

One of the country's worst-hit with the Coronavirus, Italy, has recorded over 268,000 cases with cases continue to spike, with newly registered cases yesterday just over 1,200. Italy is predicted to be one of the first to get a grant from the Bloc's 750 Billion Euro grant as it suffers from worsening GDP growth pre-Coronavirus. Italy is set to release Manufacturing PMI's to 52, slightly higher from 51.9 last month.

Tuesday 1st September – Euro core inflation rate Year over Year

Europe is currently experiencing a resurgence in Coronavirus cases as an early lifting of lockdowns just before Summer has forced a spike across Europe. However, many countries are against a second lockdown due to the Economic calamity it will bring. Analysts predict a drop in the inflation growth rate to 0.9%, down from 1.2% in July.

Non-farm payroll – Friday, 4th September

The United States continues to post daily double-digit Coronavirus cases as their total case count tops 6 Million. As elections approach in just over a month, President Donald Trump continues to let the economy open to win over voters. Non-farm payrolls are predicted to be just over 1.4 million, down from a previous 1.73 million print.

As usual, we have many critical economic events that traders need to watch out for to avoid being whipsawed by the market in the week ahead.

Trade Cautiously.

UK CPI, Japan GDP - Week ahead

There will be a week ahead post where the data being released will revolve around how well the economy chugging along, and analysts will argue whether a country has reached its peak or whether the NASDAQ is undervalued at 40 times earnings. However, this week isn't that week. Coronavirus continues to be the primary context around headlines, showing that we are still in the pandemic's neck. I have a feeling that it will be like this until real progress regarding a vaccine is achieved. Here is your week ahead.

Sunday, August 16th – GDP of Japan, Quarter over Quarter

Japan continues to post significant Coronavirus figures, with over 1,200 Saturday, topping 1,000 for the third straight day with cluster outbreaks as summer holidays begin. Initially praised for their laissez-faire regarding their quarantine strategy, i.e., has come back to bite them. However, unlike New Zealand, where they essentially forced everyone back into their homes at the slight hint of a potential outbreak, Japan continues to allow its residents outside. For example, they placed restrictions on the maximum number of spectators, concerts, professional sports, and other events – to 5,000. This has made analysts wary of Japan, considering they had low GDP growth before the Coronavirus pandemic. Analysts predict a contraction of 7.3% last quarter, at an annualized pace of 26%. A 7.3% contraction this week ahead would mark the largest GDP decline post-world war.

Tuesday, August 18th – RBA Meeting minutes, report

Like Japan, Australia was praised for its laissez-faire approach resulting in early positive results in Coronavirus cases. However, also similar to Japan, that approach has come back to bite them. Most notably in the state of Victoria, in which the Coronavirus has run rampant. Although the rate of daily increase in cases has slowed down due to the Premiere of Victoria, forcing a mandatory quarantine to all citizens, they are still recording triple-digit cases regularly. They recorded 279 new cases today, with 16 deaths. However, this is an improvement from 2 weeks ago, when they were recording jumps from 200 to 700 new cases in a day. Australia's RBA before the "second wave," took a confident approach that Australia would be capable of pulling out of the pandemic similar to New Zealand with a lower economic cost, and their monetary policy showed that. However, due to the second wave, the report being released will likely be extremely dovish and hint and further rate cuts in the future.

Wednesday, August 19th – UK CPI figures

The UK has seen its Coronavirus curve slowly rise, and that has made government officials anxious. They have recorded over 1,077 new Coronavirus cases in the pasty day, which is slightly under their 1,097 seven-day moving average. However, analysts predict CPI a small change from a 0.6% increase in the CPI to a 0.7% increase this week ahead. If the increase is larger than expected, we should see the GBP strengthen against its peers.

Wednesday, August 19th – Canada CPI Year over Year

Canada was one of the only nations to not impose a strict lockdown for its citizens and come out flattening the curve. Yesterday, Canada confirmed 237 new cases. While not entirely eliminated, the country has not experienced breakouts similar to that of Japan and Australia. Previously, the CPI was up 0.7% compared to a year ago, with analysts predicting a CPI increase of 0.2% this week ahead. With such wild variations, it is yet to be seen what the CPI is going to be. However, a rise in CPI signals a bullish stance in the Canadian dollar, with a hawkish central bank.

Thursday, August 20th – USA FOMC Minutes

The United States is not close to flattening the curve.

A staggering number: 5,565,114 Coronavirus cases, 173,080 deaths – a 6% mortality rate. The United States has not been able to flatten the curve. With an election coming up, President Donald Trump has tried to re-open the economy to boost his chances come election time. However, this has not worked. His selflessness has cost many people their lives. Usually, a market-moving event, TD Securities analysts noted that "at the July FOMC meeting, the Committee did not imitate any new policy actions, and that changes to the statement were minor." Combining this with August being a month were a lot of traders and managers take leave for their summer holidays, we should expect this to be relatively non-market moving.

As stated above, this month tends to be quite slow due to many traders, investors, and asset managers taking leave for the summer holidays. Therefore, the market should be relatively muted at this time. This may be an excellent opportunity for traders and investors to backtest their strategy or even paper trade to practice for the coming months. Many elections are coming, such as the United States and New Zealand general elections, which will cause significant market moves.

Trade safe! Have a good week ahead.

RBA decision: What to expect?

"RBA would hold the cash rate steady at 0.25%, " analysts at Wespact predict. 

Is there a possibility of a rate cut?

What are we to expect with RBA’s decision today? On the back of two rate cuts from 75 to 25 basis points, the focus remains to be on the outcome of the Coronavirus. Australia’s current figures stand at 6,825 confirmed cases with 95 deaths, an implied fatality rate of 1.39%, one of the lowest in the world. The real test, not just for Australia, but for the majority of countries who have had strict lockdown restrictions is following weeks after lockdown is lifted. A possibility of a second wave may force governments to implement stricter lockdown procedures, all but destroying short term economic recovery. This may spur the RBA to cut rates even further or increase their daily purchases in government bonds. 

However, there are tentative signs which point to the RBA leaving rates as is. Firstly, they have reduced their daily purchases in Australian Government Bonds from $4-5 Billion a day an average of $750 Million. This may imply that they are giving themselves some breathing room and firepower just in case the Coronavirus outlook gets worse once businesses return to normal, stating that “If conditions warrant it, we will return to daily bond purchases.” A similar rationale could be used to predict whether or not they cut rates later today. 

The immediate due to the Coronavirus is predicted to be around $50 Billion AUD, seeing GDP plunge 10% in the June quarter according to Treasurer Josh Frydenberg.

RBA's Interest rate against Unemployment Rate

The Reserve Bank of Australia has a mandate of achieving full employment, ensuring the stability of the currency and the economic prosperity of the people of Australia. Philip Lowe, Governor of the Reserve Bank of Australia, stated that he was “confident that our economy”; however, he further emphasized that the “unemployment rate will remain above 6%” over the next couple of years. He also cautioned against “returning to business as usual” as it would “cast a shadow” over the Australian Economy. This suggests a prolonged period of low rates until they are on track to achieve their full employment target of 4.5% again.

Potential upside for the AUD?

We should expect some volatility around the time of the RBA’s decision. As analysts forecast no rate changes, all eyes are on the RBA’s forecast for the Economy. A better than expected forecast may push the AUD to the upside, on the back of geopolitics between the United States and China pushing the AUD down, which Anish Lal explained in an excellent video here.  

 An abysmal US Retail Sales figure of -8.7% for March, all eyes are on the release of Q1’s Retail Sales figure for Australia, as it may give some insight on the potential damage the mandatory closures of retail stores have been.

 Talks to reopen borders between Australia and New Zealand

With New Zealand reporting an unprecedented zero new cases on Monday alongside Australia having one of the lowest fatality rates, talks between both governments on reopening borders between countries have started. This may help boost the shattered tourism industry in New Zealand, while slowly spurring demand in both countries and giving some slight relief, if any, to airlines. But Prime Minister Jacinda Ardern warned that there would be much work required to make a “Trans- Tasman bubble” safe and hinted that would not be such a bubble in the shorter term.  

 News of the bubble being implemented would bring significant tailwinds for both the NZD and the AUD. If all goes to plan and the coronavirus outlook after the bubble has been implemented remains stable, the chances of the RBA's decision of leaving rates as-is will drop significantly.  

Phliip Van Den Berg, an analyst here at Blackbull markets has some excellent technical analysis on the AUD/CAD pair in light of the RBA’s decision later today. You can watch the video here.