The Australian Dollar seems to be pulledin two directions simultaneously. On the negative side is the dovish RBA Governor Lowe speech last week that appears to be a setup for a full QE programme announcement at the November 3rd meeting. On the positive side are the solid bounce-back in risk sentiment and the strong Chinese data overnight, with the weak Q3 GDP numbers off-set by strong September Industrial Production and Retail Sales data. Moreover, the Chinese yuan is trading back toward the cycle highs despite the recent apparent attempt to slow its rise. A move lower in AUD/USD pair here below 0.7000 and AUDJPY below 74.00 may be more up to US stimulus prospects and risk sentiment supporting safe havens rather than any isolated AUD weakness.
Australian Dollar is in danger to sink
Governor Lowe said last week: “As the economy opens up…it is reasonable to expect that further monetary easing would get more traction than was the case earlier”. In our opinion, the speech suggests a readiness to ease further as the economy continues upon the reopening trajectory with restrictions being wound back gradually and state borders beginning to reopen.
The Governor did flag the potential drawbacks to further policy easing centered around financial stability concerns but went on to emphasize the near term risks to financial stability posed by labor market conditions and private sector balance sheets over the longer-dated concerns surrounding inflated asset prices and speculation. In many ways, echoing recent Fed communique indicating the trade-off between jobs and incentivizing speculation in housing and financial markets. In that trade-off, the labor market alongside progress toward long-term objectives of full employment and meeting inflation targets wins for central banks. With the macroeconomic stability concerns perhaps a job for the likes of APRA.
The Governor also signaled larger central bank balance sheet increases in other countries and the ACGB 10yr yield remaining high on a relative basis. Reasonably a nod to their trans-Tasman fellows at the RBNZ who have been more proactive in their policy responses. Besides, a recognition of the role a weaker currency could play in policy transmission. In our opinion, evidence of a shift toward outright QE with the intent of lowering longer-dated yields. Although the timing of this movement less certain that the lowering of the cash rate, YCC target, and TFF rate in November.
The final dovish pivot was again a nod to a recent communique from the Fed centered around enhancing dovish forward guidance and committing “big” to inflation. The Governor signaled a shift toward “putting a greater weight on actual, not forecast, inflation”, in our view committing to not raise the cash rate until actual inflation is within the 2-3% target range. A shift that mirrors the Fed’s recent pivot toward average inflation targeting (AIT). Validating that the Australian economy will be left to run hot before the board raises the cash rate.
Taken together the commentary signals a readiness to continue to support the revival via additional easing of monetary policy, with little reason to wait. As such, we expect at the next board meeting in November a 15bp cut in the cash rate, YCC target, and TFF rate to 10bps. However, the timing of an outright QE package could possibly be extended into 2021.
The RBA may hold fire on the outright QE package, monitoring the evolution of household and business spending throughout the December quarter as government assistance becomes more targeted. Perhaps holding back on the launch of an outright QE package until Q1 of 2021 in a bid to cushion the fiscal cliff set to emerge as support rules are wound back.
More US stimulus?
The US stimulus question may finally be nearing a
near-term resolution as the weekend saw US House Speaker Nancy Pelosi issuing a 48-hour deadline (apparently Tuesday night) for a stimulus deal if anyone expects something to pass before the election. Some Republicans are willing to burn bridges to Trump due to the Democrats’ commanding lead in the polls and at odds with the president on whether a big stimulus package is advisable. The headlines suggest that stimulus prospects are still strong. Even when they appeared less strongly recently, the narrative seemed to be that the rising odds of a Democratic clean sweep of Congress and the presidency at the election will mean a far bigger package will be coming by spring either way. The market feels somewhat complacent here, and there is room for a mishap on the stimulus front that sees another modest leg higher in the US dollar, but confidence in reading the market here is low.