RBA Lowe: Mid-March package is working and building a bridge to recovery

Reserve Bank of Australia Governor Phillip Lowe is appearing before the Senate Select Committee on COVID-19 (linked attached).

Key comments

It is possible economic downturn will not be as severe as feared

Much will depend on whether confidence can be restored.

Confident that the inflation target band will be met of 2-3%, but it will be some time away. 

Some pick up in employment in industries most affected by the shutdown - that's good news. 

We could see weakness in construction and professional sevices.

Latest jobs data were a shocking set of numbers.

Job data were not quite as bad as first thought.

Signs of bottoming out in labour market.

Seeing some pick up in employment by most affected industries.

Pipeline of existing work for some industries is thinning out.

Will see further declines in jobs in May, but not as bad as April.

Decline in jobs could now be 15% as opposed to 20% as first feared.

Economic outlook is incredibly uncertain.

Fiscal policy will have to be used.

Will not raise until full emp;loyment and 2-3% target range is acheived.

I have trouble seeing seeing for quite some time full employment, it will be a long drawn out process.

We will keep rates at where they are perhaps for years. 

Too early to say what economy will be like in 4-months time. 

We will not return to growth and tlining stadards we ahve seen over the last 20-years. 

I don;t thionk negative rates work and there is limited appatite for them. 

 

Market implications

This is a live event, but at this juncture, the rhetoric is positive and intentionally so, as Lowe expresses the importance of how the onus is on the Australian population to consume, relying on confidence. There is a limit to what the RBA can do from here and he is encouraging more fiscal policy – "Main concern is that we don't withdraw the fiscal stimulus too early," Lowe said.

AUD/USD has been unable to really rally on the positives (scored a corrective high in a 5-pip move and that's it). Markets are inclined to tread cautiously at this juncture. The Chinese currency is likely to be a dominant theme in Aussie markets. In NY, it sunk to the weakest levels vs the US dollar since the lows of the trade wars, a fresh 12-year low. 

The yuan is not bouncing back anytime soon. We will not see the type of upward pressure on the yuan like what we saw since 2005 which was principally driven by the accumulation of Chinese trade surpluses over the years. Nor will we see large-scale foreign direct investment (FDI) inflows or demands for China's supply chains. If the China trade surpluses comes to an end at the same time that foreign investment in China dries up, the decline in the currency's value is inevitable.

This is problematic for Australia's exports and the economy as a whole. There is a trade war brewing between the two nations and heightened tensions between the US and China to keep this time-bomb for the Aussie ticking. 

Lastly, the fact that Lowe has confessed today, and time and time again, that there is no appetite for negative rates, should the RBA be forced to move to there and reluctantly so, that would be a highly negative factor for AUD.