Tomorrow is the day a lot of AUD traders have been waiting for; the scheduled meeting of the RBA.
Not because we expect the bank to make any significant policy changes, but to see what the expectations of the bank are after all the changes they’ve already made.
Before the coronavirus outbreak, the RBA had intimated that a 0.25% reference rate would be the bottom of their policy range. And if more easing was needed, then they turn to unconventional measures.
Well, that’s where we are now. So, what will the bank do going forward?
The Need for Easing
The data has taken somewhat of a backseat to news about the pandemic. On Friday, the market hardly reacted to a major upset with the NFP figures.
Over the weekend, it appeared that the number of cases was finally leveling off, which has put some risk appetite back into the markets. But it also appeared that China was bracing for another wave of infections, and that would cloud the outlook for Australia.
Most businesses are holding off activities because they don’t know how long the government measures to combat the disease are going to last. Therefore, central banks have been under enormous pressure to provide liquidity.
The RBA has been injecting around AUD2.0B a day over the last couple of weeks.
What We Are Looking For
There’s a bit of a discrepancy between what economists say they expect, and what the markets are actually pricing in.
The latest survey of economists by Bloomberg shows a strong consensus that the RBA will hold steady. This would be in line with the bank’s stated policy of 0.25% being their lower bound.
Money markets, however, are pricing in a 25bps cut tomorrow. Consequently, if the economists are right, then we could see the AUD gaining a bit of strength after the meeting.
But, if the bank does cut, despite it being billed as a surprise, the market might take it in stride.
What the RBA has repeatedly said they are not interested in are negative rates. 0% of course, is not negative rates, yet, so it certainly is possible to have a little bit of a cut.
However, the market certainly agrees that the reserve bank can do more to help out. But, given Lowe’s trajectory, rate cuts are not as likely as increasing bond-buying and liquidity injections.
The coronavirus has been hammering Australia’s exports, putting increased pressure on the currency. Steelmakers have been suspending operations, causing the price of iron ore to dip.
The price war between Russia and Saudi Arabia has slashed the price of Australia’s third-largest export: LNG, which is priced in line with crude. Tourism and education account for Australia’s fourth and fifth largest exports.
In the end, the RBA is reacting to the situation caused by the coronavirus; so the news we get on that is likely to supersede even an interest rate decision. Economic recovery is not on the table until businesses get some guidance from Canberra about when the measures will be lifted.