Australian Dollar Spikes Higher as RBA Keeps Monetary Policy Settings Steady

AUD/USD, Reserve Bank of Australia, Interest Rate Decision, Stage 4 Lockdown – Talking Points:

  • The Australian Dollar spiked higher after the RBA kept the target for the official cash rate and 3-year yield steady at 0.25%
  • Stage-four lockdown restrictions in Australia’s second most populous state may weigh on regional risk assets
  • US-China tensions could hamper the risk-sensitive Australian Dollar’s recent rally

The Australian Dollar surged higher after the Reserve Bank of Australia kept the official cash rate and 3-year yield target steady at 0.25%, and in line with expectations.

Although “the Australian economy is experiencing the biggest contraction since the 1930s”, Governor Philip Lowe and his fellow committee members believe “the downturn is not as severe as earlier expected and a recovery is now underway in most of Australia”.

However, the Governor conceded the recovery is “likely to be both uneven and bumpy, with the coronavirus outbreak in Victoria having a major effect on the Victorian economy”.

Nevertheless, the Reserve Bank is retaining its wait-and-see approach as “the mid-March package of support for the Australian economy” is continuing to work as expected and “the Australian Government’s recent announcement that various income support measures will be extended” will help to support aggregate demand.

With that in mind, the Australian Dollar may continue to outperform its major counterparts, should enhanced lockdown restrictions suppress a ‘second wave’ of Covid-19 cases in Victoria – Australia’s second most populous state.

AUD/USD 5-minute chart created using TradingView

State of Disaster Declared in Victoria as Covid-19 Cases Climb

Regional risk assets have been incredibly resilient amid a ‘second wave’ of Covid-19 infections, as the commodity-linked Australian Dollar pushed to fresh yearly highs despite the imposition of stage three restrictions in Victoria, on July 21.

In fact, the risk-sensitive currency seemed to climb alongside case numbers, strengthening to the highest levels since April 2019 at the end of last month as a staggering 723 new infections were recorded nationwide on July 30.

However, Daniel Andrews’ decision to tighten lockdown measures and declare a “State of Disaster” in Victoria may drag on the Australian Dollar in the near-term, as the Victorian Premier stressed that “until we fix the health problem, until we get these cases numbers down to a much, much lower level, we simply cannot open the economy up again”.

Australian Dollar Spikes Higher as RBA Keeps Monetary Policy Settings Steady

Source – Covid19Data

The tightening of restrictions “will mean around 1 million Victorians are no longer moving around the state for work”, with the measures placing Melbourne – the state’s capital – under a six-week curfew between 8pm and 5am.

With the state accounting for “about a quarter of the national economy” Treasurer Josh Frydenberg describes the recent developments as “a massive kick in the guts to Victorian businesses [and] a serious impediment to the nation’s recovery”.

To that end, infection numbers will be watched closely over the coming weeks as Andrews stated that “if we don’t do this now, if this doesn’t work, then we’ll need a much longer list of complete shutdowns”.

Australia-China Tensions Threaten to Boil Over

Looking ahead, the strained relationship between Australia and China – its biggest trading partner – will prove pivotal in dictating the outlook for the Australian Dollar, in light of the Chinese embassy in Canberra urging “Australia not to go further down the road of harming China-Australia relations”.

The warning comes amid Australia-US Ministerial Consultations (AUSMIN), where comments from US Secretary of State Mike Pompeo praised his Australian counterparts “for standing up for democratic values and the rule of law, despite intense continued, coercive pressure from the Chinese Communist Party”.

Cognizant of Australia’s economic dependence on China, Foreign Affairs Minister Marise Payne moved to distance herself from Pompeo’s anti-China rhetoric stating that “the Secretary’s positions are his own…Australia’s position is our own”.

However, Australia’s inclusion in the “Five Eyes” alliance threatens to drag the trade-dependent economy into China’s cross-hairs as tensions escalate between the US and Beijing.

With that in mind, the Australian Dollar could come under pressure should trade relations deteriorate, as the Trump Administration notably ramps up its attacks on the Chinese Communist Party (CCP) ahead of US elections in November.

— Written by Daniel Moss, Analyst for DailyFX

Follow me on Twitter @DanielGMoss

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