In the final meeting of the year, the Reserve Bank of Australia kept interest rates unchanged at 0.10% as investors were expecting. The RBA also maintained the 3Y bond yield target at 0.10. The board said that it was not expecting to raise interest rates for at least the next 3 years and is prepared to do more if warranted by the spread of COVID-19. The Board recognised that ongoing fiscal and monetary support will be needed for some time. You can download the full statement here.
The key point to recognise is that the Board also noted that Australia’s economic recovery is now underway and that recent data was better than expected. This was reinforced by the better than expected GDP data last week printing +3.3% q/q vs. +2.5% expected. This is a positive print. This optimistic perspective was echoed by the Australian Treasurer Frydenberg who said that the recession is technically over and the economy is ‘coming back’.
What does this mean for traders?
The RBA’s assessment does tend towards pessimism and caution considering that data is improving for Australia. They are a central bank, so they need to plan for the worst. However, the hopes of an effective vaccine and the fact that Australian households income went up during the crisis (through Gov’t support) even while output went down means that people can spend. Yes, unemployment is still elevated, but a vaccine means that jobs should start appearing again for those looking for work. Here are the key points for traders:
- The RBA is not now expected to cut rates. The next move will be up and that is good news for the AUD.
- The bias is to the upside now for the AUD.
- The recent strong rise in commodities, such as iron ore and copper, on global growth hopes, will further support the Australian economy.
- Rising wages and labour data will be key to confirming this more positive outlook. If we see good jobs and labour data then expect rapid AUDUSD gains.
- Expect AUDUSD buyers on dips now heading into 2021 unless global conditions weaken again.
