Monday, February 17, 2020

Is the RBA's outlook for the Australian economy too optimistic?

Tags
  • China
  • Stocks
  • AUD
  • RBA

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Analysts’ Pick: Is the RBA's outlook for the Australian economy too optimistic?

  • RBA’s meeting minutes unlikely to surprise or drive the Australian dollar
  • The economic impact of the coronavirus may be over-discounted by financial markets

Tomorrow's RBA monetary policy meeting minutes will likely show RBA officials adopting a wait-and-see approach. In the latest statement to monetary policy, the RBA was focused on the negative effects of a further rate cut from the record low rate of 0.75%. A rate cut will likely put upward pressure on housing prices (which have already extended into six-month recovery since July 2019), which consequently will encourage Australians to increase their debt to purchase additional property and as a result weigh on consumer confidence on financial stability.

Lower borrowing costs likely helped fuel a recovery in housing prices in Australia

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The statement also indicated that the RBA was optimistic of the growth potential of the Australian economy despite the downside risks, namely the coronavirus outbreak and the bushfire crises that the country is currently facing. With signals that RBA Governor Lowe that quantitative easing is possible, the RBA may be forced into a 25bps if economic data shows Australia in an extended slump. This is unlikely in the short-term however and will probably only be in the later half of 2020 as the RBA will probably be more inclined to wait to ensure that the full effects of its earlier rate cuts in 2019 is being reflected in the economy.

Bushfires in Australia and the Covid-19 outbreak has put roughly a 3.8% downward pressure on the Australian dollar

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Emerging markets and financial markets across the world are already recovering from the drop resulting from the coronavirus outbreak despite climbing death tolls and confirmed cases

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The short-term outlook for the Australian dollar is however tilted more towards the downside thanks to the unexpected covid-19 virus outbreak since late December 2019. The extended shutdown of businesses in China to slow the spread of the virus and global caution will likely weigh on the Australian economy. As Australia's top trading partner by far (China contributes to 31.9% of total trade and 38.63% of exports while Japan, Australia's second top trading partner, only contributes to 12.38% of total trade and 16.79% of exports), the economic effect from the virus will most definitely spillover to the Australian economy.

Australia relies heavily on trade with China, with China contributing more to trade than its next top four trading partners combined

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We expect AUD/USD to rise slightly on the RBA's meeting minutes towards 0.6744's level but range between 0.6722 and 0.6744 after. But in the medium-term, we believe the outlook for the Australian dollar is still skewed towards the downside as the market may be over-optimistic on the economic impact that the coronavirus outbreak will have globally.

Technical Analysis:         

EUR/USD

Bulls and bears are in a close fight for possession of the Aussie, with the 20-day to 55-day EMAs signalling that this is likely to continue ahead of the release of the RBA monetary policy meeting minutes tomorrow. The medium-term outlook for the Australian dollar is still skewed to the downside, especially with over-optimism in the market regarding the economic impact of the coronavirus outbreak in China. If bulls do manage to break the 23.6% Fibonacci retracement level however, then AUD/USD is likely to move higher towards 0.6772’s level. But if the Australian dollar falls over the medium-term as expected, then AUD/USD will likely continue to fall towards the current 10-year low level of 0.6660.

Support: 0.6722 / 0.6706 / 0.6684

Resistance: 0.6744 / 0.6759 / 0.6772

EUR/USD Chart (H4)

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