RBA Announces $100 Billion Stimulus and Cuts Rates to 0.1%

Although all eyes are on the US election today, it’s been a pretty eventful day for Australia as well.

There have been policy decisions from the Reserve Bank and some news on the trade tensions with China. Let’s take a look at what’s happened and what this means for the Aussie dollar.

The RBA Announcement

Let’s start off with a run-through of what the Reserve Bank of Australia (RBA) announced before we take a look at the markets.

The main news from the RBA is that they’re cutting rates from 0.25% to 0.10% and they’ve announced they’ll be buying $100 billion (AUD) of government bonds over the next 6 months.

The $100 billion will be for bonds with maturities between 5 to 10 years and will be 80% to federal bonds and 20% to state bonds. These will be bought in the secondary market.

These announcements were in line with what was expected, so it was no big surprise for the market. However, as you’d expect from an announcement of quantitative easing (along with today’s risk-on sentiment globally), Australian stocks were up for the day.

Economy recovering?

It seems the Australian economy showing signs of recovery now, partly thanks to the measures taken to deal with coronavirus. With the easing lockdown restrictions in Melbourne, it’s expected that recovery may start to accelerate.

The RBA estimates that GDP has increased in Q3 and is now expecting GDP growth for the year leading up to June 2021 of 6%, followed by 4% in 2022, with underlying inflation at 1% next year and 1.5% the year after.

Unemployment has also been a big focus. The RBA expects that unemployment will peak at just below 8%, instead of the 10% they originally expected. This is likely to come down to 6% by the end of 2022.

This ties in with what they’ve announced for their next actions. They’ve said that they won’t raise rates for 2 or 3 years, not until inflation is sustainably between 2 and 3%; which will only happen when wages growth is much higher than it is now Significant gains in employment will need to be made. In October, job postings already increased by 9.4%.

As long as the virus can remain under control in Australia, we should start to see a recovery picking up speed. We would need to see demand increase, which partly depends on life getting back to normal. The savings ratio is currently at a 46-year high in Australia, which means households are sitting on a lot of cash.

This is similar to what we are seeing in the eurozone, where household deposits have risen at a rate of 10.5%, the fastest pace in 12 years. A similar situation took place in the US, where households used their stimulus cheque for savings and paying down debt, with only 29% being spent. The expectation is that an even smaller portion of a second stimulus cheque would be used for spending.

So for the economy to grow, households need to be encouraged to spend more rather than saving for a rainy day. If the virus is under control and with rates at a historic low in Australia, this is exactly what they’re hoping will happen.

Australia & China Trade Tensions Rise Again

Just today it has been reported that China has ordered traders to stop purchasing seven categories of Australian commodities including coal, barley, copper ore and concentrate, sugar, timber, wine and lobster.

China seems to be punishing Australia for previous actions regarding Huawei’s 5G network and a call from the Australian government for an independent probe into the origins of the coronavirus.

Since China accounts for 40% of Australian exports, this sort of tension will weigh on the economy.

AUD/USD Technical Analysis

Despite the RBA announcement, AUD/USD has seen a high momentum bullish move today. It’s coming off a significant swing low and moving towards the trend line that’s been holding up since the summer.

The policy decisions should have weakened the Aussie dollar, but as I said, it was pretty much already priced in by the market and at the moment all focus is on the US election. There is currently risk-on sentiment taking place.

I think whether those levels hold up will depend on what happens with the election. There’s a good chance that there will be drama and there will be a switch back to risk-off sentiment.

With the exchange rate, it seems the RBA would prefer for the Aussie dollar to be lower, but they have said they won’t take any action unless the markets get dysfunctional. This means, for now, they’re ok with where the dollar is, even if it is on the high side for them. They said the currency wasn’t the main factor in their policy decisions.

What’s next?

For now, the RBA has stated they won’t be looking at negative rates, so it seems their rate will be stuck as it is for the near future. However, they did make things quite explicit about quantitative easing, basically saying they can print as much money as they like.

It seems this policy decision is to counter a drop in rates around the world as other central banks take similar actions, but the RBA’s $100 billion will be a drop in the ocean and it’s likely they’ll have to extend it at some point in the future.

Until then, I think the focus for Australia is going to be on keeping virus cases low as they try to kickstart the economy and it’s important to closely monitor the situation with China as this could be very disruptive.

In terms of technical analysis, I’ll be monitoring those significant levels to see if either of them is broken as the US election results start rolling in.

By Nicholas Puri

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