Tuesday, July 7, 2020

Will a spike in Covid-19 cases in Australia pressure the RBA to ease monetary policy today?

Tags
  • AUD
  • RBA

07072020a_ta

Analysts’ Pick: Will a spike in Covid-19 cases in Australia pressure the RBA to ease monetary policy today?

  • RBA looks unlikely to change monetary policy at its meeting today.
  • Upbeat economic data suggests that economic activity in the Australian economy is continuing to recover in the short-term.
  • Growing downside risks domestically and internationally is likely to tilt the central bank’s outlook to be more dovish compared to its previous meeting.
  • AUD/USD may have some slight upside on the announcement of the decision but experience a net selloff post-decision as the outlook for the Australian economy may be skewed to be more pessimistic than before.

The Reserve Bank of Australia's (RBA) monetary policy decision today looks highly likely to result in another hold on policy, as policymakers continue to keep interest rates low to help support the Australian economy while it continues to experience a recovery.

The Australian dollar remains as one of the better performers against the greenback despite an expected strong contraction in the global economy, recovering close to all of its losses since the start of the year

07072020b_ta

The Australian economy continues to show signs of recovery, with most recent data showing improvements across multiple sectors. PMI data from the Commonwealth Bank of Australia (CBA) showed both the manufacturing and services sectors expanding in June, suggesting that with lockdowns easing in Australia, economic contraction likely peaked in May. This should mean that the labour market may start to show signs of recovery in June as well. Consumer spending looks to be recovering as well, growing 5.79% in May after declining 9% in April. The upbeat economic data should continue to increase the central bank's confidence in a domestic economic recovery and reduce its incentive to ease monetary policy further. While the emergence of a potential second wave in Australia will likely weigh on RBA policymakers' outlook, it will likely be taken as a downside risk to an economic recovery that has yet to materialise, instead of pushing central bankers to ease monetary policy further at today's meeting.

Australia’s domestic economy has continued to improve since the central bank’s last meeting on June 2nd

07072020c_ta  

Internationally, the RBA will likely continue to monitor growing downside risks to the global economy. Multiple states in the US continues to show accelerating Covid-19 infections, which will increase the likelihood of the need to reintroduce lockdown restrictions. While a nationwide lockdown looks unlikely in the US, the spike in Covid-19 cases will likely cause an imbalance in recovery among states, and will be amplified further by potential state-unique restrictions to limit the spread of the novel coronavirus to states that has managed to contain its count of Covid-19 cases. China on the other hand has managed to control the spread of the novel coronavirus domestically, allowing its economy to advance despite experiencing a large contraction earlier in the year. But tensions between China and Australia will likely be considered a growing risk to the central bank.

The likelihood of renewed lockdowns in the US is increasing as multiple states in the US struggle to contain the spread of the novel coronavirus

07072020d_ta

With futures tracking the central bank's decision implying a 60% probability is being priced into the financial markets, there may be some upside potential for the Australian dollar on the decision later at 12.30pm (GMT +8). However, it looks likely that the RBA will also tilt its outlook for monetary policy to be more dovish than before and place greater emphasis on growing downside risks, in order to curb the Australian dollar's gains against the greenback.

Futures suggests that traders are pricing in a 60.7% probability for a rate cut at today’s monetary policy meeting

07072020e_ta

As a result, the Australian dollar looks likely to have a slight upside on the announcement of the decision, but experience a net downward pressure following the announcement due to a potentially more dovish statement from the central bank compared to its previous statement, as well as growing downside risks domestically and internationally. AUD/USD consequently may rebound slightly back towards 0.6988's level before falling and dipping below the 20-day moving average towards 0.6950's level.

Technical Analysis:

AUD/USD

Bulls have dominated the Australian dollar since June, pushing the AUD/USD currency pair above the 200-day moving average as risk appetite grew in the market. Speculation for a recovery in commodity prices likely also helped the outlook for the Australian dollar. Coming off overbought levels in the RSI indicator, the Australian dollar looks likely to continue to have some downside pressure following the RBA’s monetary policy meeting today. Bears will likely look for a chance to push AUD/USD below the 20-day moving average and try to test the support level at 0.6905. Breaking the 0.6905 support looks unlikely however, as bulls are likely still in control of the currency pair and will be helped from momentum and possible dip buying.

Support: 0.6905 / 0.6850 / 0.6805

Resistance: 0.6988 / 0.7023 / 0.7099

AUD/USD Chart (H4)

07072020f_ta