Tuesday, April 7, 2020

Is there more room for the RBA to ease policy?

Tags
  • Dollar
  • AUD
  • RBA

04072020a_ta

Analysts’ Pick: Is there more room for the RBA to ease policy?

  • We think its unlikely that the RBA will make any huge changes to monetary policy
  • The outlook for AUD/USD may have upside potential today as the RBA will likely affirm to financial market of its willingness to do more if necessary
  • For the week, we may see the dollar strengthen slightly as the coronavirus takes it toll on employment data and consumer sentiment
  • AUD/USD could possibly fall back towards 0.6096 towards the end of the week after potentially rising to 0.6147’s level today

The Reserve Bank of Australia (RBA) is set to announce its decision on monetary policy today at 12.30pm (GMT +8). This will be the central bank's first meeting after its emergency meeting on March 18th that saw the bank cut its cash rate target by 50bps to 0.25%, a historic low. The RBA also introduced a new quantitative easing program for the first time, that targets the yield on three-year Australian government bonds near their target cash rate of 0.25%. In addition, a new scheme to lower borrowing costs was announced, in which the RBA will provide a three-year funding facility to authorised deposit taking institutions at a fixed rate of 0.25%.

The RBA slashed its target rate to the lowest in history amid the coronavirus crisis

04072020b_ta

We do not expect the RBA to make any big changes to monetary policy later today, as the central bank will likely be more inclined to wait for the economy to reflect the effects of the changes on March 18th instead. The reason for this is due to the current level of uncertainty of the coronavirus outbreak. With China reopening factories, while still battling new cases of the virus, the Australian economy should see some improvement. Furthermore, while the number of new cases of the virus in Australia is climbing, it has decelerated in recent days. Consequently, the RBA will likely focus on reviewing its current monetary policy.

Cases of the virus spiked late in March but decelerated towards the start of April as well

04072020c_ta

While we do not see any changes to its cash rate target, there may be some slight changes to its quantitative program especially since it’s the first time the central bank has rolled out quantitative easing. The probability of this is likely low, as the RBA has managed to bring the yield curve nearer towards its effective lower bound target cash rate of 0.25% in the short-term.

Yields across the curve has converged towards the RBA’s target rate 0.25% since March 18th

04072020d_ta

As a result, we do see the Australian dollar rising slightly higher as the RBA will likely affirm the market in its willingness to do more should it deem necessary. The easing of risk aversion in the general financial market is also likely to help boost the Australian dollar as the greenback weakens slightly.

Risk aversion looks to be easing in the financial markets as VIX starts to fall back to range in the 40s

04072020e_ta

Then on Thursday, initial jobless claims for the week ended March 27th and the University of Michigan's consumer sentiment survey for April may boost demand for the dollar as the datasets may come in worse-than-expected. Initial jobless claims hit 6.65mn for the week ending March 20th, the highest number of claims in a week on record. While the median forecast for claims by economists is at 5mn as of April 7th, we expect initial claims to slow from 6.65mn to range between 5.5mn and 6mn, as retrenchment continues at a slower rate but from a greater number of smaller states in the US.

Initial jobless claims is likely to be closer to economists’ estimates for the week ended March 27th as it starts to converge back to its four-week average

04072020f_ta

Later on Thursday the University of Michigan's consumer sentiment survey will probably plunge. Economists’ estimates a drop to 75.0 in consumer sentiment for April, although this might be greater after factoring the spike in unemployment, extended lockdowns and change in US President Donald Trump's tone. Trump extending the lockdown in the US to April 30th after signalling that he would like to end it during the Easter holiday later this week will probably weigh on sentiment. A special report from the University signalled that consumer sentiment has been boosted by the belief that the effects of the coronavirus is temporary will also contribute to sharper decline this month as compared to March after US public health officials said that the death toll from the virus could range between 100,000 and 200,000 as well. We expect the index to range between 70 to 74 instead as a result.

Hence, we see AUD/USD gaining today on the RBA's monetary policy statement, possibly towards 0.6147's level as the Australian dollar strengthens and greenback weakens on momentum of easing risk aversion. Then later on Thursday, the greenback may strengthen slightly, pulling AUD/USD back lower towards 0.6096's level. The risk to Thursday's drop is optimism in the global economy as OPEC+ is set to meet and discuss a possible production cut as well, which if agreed on may be able to drive the greenback even lower as risk appetite grows again through the week.

Technical Analysis:         

AUD/USD

Bulls are in possession of the AUD/USD forex pair currently, as risk aversion eased in the financial market, allowing bulls to gain momentum and charge forward. Today’s RBA statement may help bulls gain more momentum, although Stochastic RSI signals that the forex pair may be overbought. We do think that the outlook for the Australian is skewed to the upside in the short-to-middle term, with aa uptrend already forming for the currency pair. Fundamentally, demand for the dollar should ease as new cases of the coronavirus starts to slow across the globe as it eventually hits its peak.  As a result, we may see AUD/USD break the resistance level of 0.6147 today, although we may see a slight drop later in the week as economic in the data might come in worse than expected, which could slightly strengthen the dollar, pulling the Aussie back towards 0.6096’s level as demand for the dollar’s safe haven properties increases.

Support: 0.6056 / 0.5990 / 0.5896

Resistance: 0.6147 / 0. 6194 / 0.6235

AUD/USD Chart (H4)

04072020g_ta