RBA RATE DECISION: WHAT TO EXPECT

At the last RBA rate decision on August 4, officials chose to hold the overnight cash rate at 0.25 percent and maintained that same yield target for 3-year sovereigns. About two weeks later, officials said they are prepared to adjust the stimulus package if the circumstances warranted it. Policymakers added that additional fiscal and monetary support may be necessary for some time.

Having said that, RBA Governor Phillipe Lowe stated that “The Australian economy is going through a very difficult period and is experiencing the biggest contraction since the 1930’s. As difficult as this is, the downturn is not as severe as earlier expected and a recovery is now underway in most of Australia”.

Economic Stabilization

As the statement by RBA Governor Phillipe Lowe states: “The outlook remains highly uncertain. The recovery is expected to be only gradual and its shape is dependent on containment of the virus”. For Australia, this is a somewhat gloomy message as the country re-imposes aggressive lockdown measures to contain a flare-up of Covid-19.

For a cycle-sensitive currency that is tied to an outward-facing economy, early signs of improvement are re-assuring for countries that are anchored to the global growth outlook. Consequently, if economic data this week – particularly the cascade of PMI reports coming out of developed and emerging markets – reinforces this notion of improvement, the Australian Dollar may rise.

STRONG RISK APPETITE BOOSTING DEMAND FOR HIGH-YIELDING ASSETS

As a positive knock-on effect, economic stabilization – along with aggressive support by central banks – buttresses risk appetite adds another gust of wind to AUD’s sails. Overlaying Deutsche Bank’s Australian Dollar currency index with an AUD inflation swap zero coupon (10Y) shows price growth expectations rising in tandem.

Reference by: Dimitri Zabelin, Currency Analyst for DailyFX.com