Tomorrow morning at 05:30, the RBA will make its policy decision. Rates are almost certainly going to stay put at 0.1%, but there are bigger questions around the asset purchase programme.
Going into the meeting, the AUD has been under some pressure today and is down around 0.4% as it seems investors expect more dovishness rather than hawkishness from the RBA at this meeting. However, is this view justified?
Well at the previous RBA meeting, Governor Lowe indicated that further asset purchases were less effective at helping the economy than government support and argued in favour of the taper plan announced last month. The announced plan would scale back purchases to AUD4bn from AUD5bn.
However, 10 out of 16 economists surveyed by BBG expect a delay to this taper given the additional lockdowns which have been introduced to stem the delta variant. The RBA said it would be prepared to change its stance if there were a “significant setback” to the economic recovery. The question therefore is, do the new lockdowns count as a significant setback?
Lockdowns are expected to take a significant toll on the economy, and some economists are significantly cutting back their growth forecasts for 2021. Westpac stand out on this front, cutting its 2021 forecast for GDP growth to 0 from a previous estimate of 2.4%.
But despite these risks, there is some possibility of a hawkish surprise. The reason for the RBA’s taper was partly down to supply since QE purchases were outpacing bond sales. This is likely to still be the case going forward. Even a slower pace of QE is still likely to represent a more accommodative stance given the lack of issuance coming - i.e. the proportion of AUD owned bonds will increase still.
While I don’t give this argument much credit, since a surprise taper would lead to significant currency strength which the RBA probably wants to avoid in order to maintain a dovish stance, it is possible the RBA will see the situation this way.
My View:
I don’t usually like to make predictions on economic releases given how most professional economists are not that good at predictions. But in this case I will make an exception… I think the RBA holds off on a taper for another month - probably saying it now plans to do the next leg of the taper at the next meeting instead. Rates will obviously be held at current levels.
Market Implications:
I’ve marked up a few levels on the daily chart for AUDUSD and for me it is interesting to see how much AUD has strengthened recently - moving away from a 0.70 handle up to around 0.74. This has all come very quickly and any extra dovishness from the RBA could well lead to a reversal of this.
Technically, nothing that exciting apart from the small square which shows you the "death cross" where the 50d MA dropped below the 200d MA.
The RSI doesn't point to extreme conditions at the moment, so there's not much from a technical perspective to get excited about.
It seems AUDUSD has been driven by the differential between AUD and USD rates with the 10y difference seeming to be something of a driver. What I would note from this though is the recent 4% rise in AUDUSD has only been accompanied by just over a bp of change in the 10y yields. This seems like there is a little bit of froth perhaps in AUD from here which is why I maintain my bearish bias.
Looking back at the first chart again, if we break below the 0.742 support I expect we will start to see a more significant reversal back toward 0.72.
So what’s the trade?
Well you probably won’t be surprised to hear I am still pushing my SELL AUDCAD trade. I think there is still a lot of risk holding outright USD positions over the next few weeks so I would rather play the crosses.
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