RBA Preview: Rate cut and QE expansion to turbo-charge economic recovery

  • RBA Governor Lowe expressed concerns over higher Australian 10-year yields.
  • RBA seen cutting rates to a record low of 0.10%, expanding QE by A$100 billion.  
  • AUD/USD’s fate hinges on the extent of QE expansion, USD dynamics.

The Reserve Bank of Australia is expected to go all out with additional monetary policy easing this Tuesday, in an effort to turbo-charge the recovery from its coronavirus pandemic induced first recession in nearly three decades.

The RBA is likely to lower the Official Cash Rate (OCR) by 15bps to a new record low of 0.10% from the current 0.25%. The board members are also seen cutting their target for the yield on three-year government bonds to the same level.  An expansion of AUD100 billion to its government bond-buying program, quantitative easing (QE), is also due on the cards.

RBA to boost employment, lift-off pressure on AUD

The Australian central bank is set to roll out more stimulus and thereby, move towards achieving its objective of jobs growth, as the coronavirus situation in the South Pacific nation improves, with no new daily community infections reported off-late.

The minutes of the October 6 policy meeting revealed that the RBA board members “continue to consider how additional monetary easing could support jobs,” adding that “addressing the high rate of unemployment an important national priority.”

Additional easing by the RBA could help lift the business morale as well as the consumer spending ahead of Christmas and New Year festive season.

Further, the likely QE expansion could be in the wake of RBA Governor Phillip Lowe’s recent comments, expressing concerns over higher Australian 10-year bond yields longer-term when compared to its developed peers.

The RBA will ramp up its purchases of longer-dated government bonds, in order to stem the appreciation of the AUD and boost the export competitiveness.

AUD/USD possible scenarios

Fundamentally, the economy is on a gradual recovery path from the pandemic impact, in light of the government’s record Budget, improved business confidence and upbeat quarterly inflation. However, slowing labor market recovery and the AUD strength keep the RBA unnerved.

Heading into the RBA decision, the key focus for markets is the US election and the uncertainty surrounding the outcome, which lifts the haven demand for the US dollar while weighing on the risk assets such as the aussie. Meanwhile, surging coronavirus cases in Europe and the US also dampens the market mood.

Also, it's worth noting that RBA’s additional easing is already priced-in by the markets, reflective of the recent tumble in AUD/USD from near 0.7200 to sub-0.7000 levels. The price has breached the key ascending trendline support on the daily chart and therefore, a QE expansion of above AUD100 billion could further boost the AUD sellers, opening floors for a test of the 0.6900 level.

Alternatively, a run towards the critical resistance around 0.7080 cannot be ruled out on a smaller QE announcement and/ or if the risk tone improves and drags the greenback southwards.


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