RBA to hold steady in the line of fire AUDNZD
Tony Sycamore August 4, 2020 9:40 AM
What was previously anticipated to be an uneventful RBA interest rate meeting this afternoon has grown rapidly in importance. After three weeks of Stage 3 lockdowns failed to contain Victoria’s Covid-19 outbreak the “Greater Melbourne” area has moved to Stage 4 lockdowns.
Evening curfews, the shuttering of the retail and manufacturing sectors, additional police compliance powers, and the scaling-back of workforces in the construction and wholesale industries will severely disrupt the Victorian economy that accounts for approximately 25% of the nation’s GDP.
This has prompted some economists to speculate that the RBA might cut interest rates this afternoon from 0.25% to 0.1% in an attempt to bolster confidence and to address the deteriorating outlook for the Australian economy.
As interest rates are already at the effective lower bound, there is a limit to what a cut today would achieve. If a business’s cash flow is reduced to zero, lower interest rates will do little to help and it certainly won’t prompt a business to go out hire and spend.
Fiscal support is a more effective policy response. Yesterday the Federal Government announced a new A$1,500 “pandemic leave disaster payment” for Victorians and JobSeeker and JobKeeper were both recently extended to avoid the “fiscal cliff”. Australia remains in a sound position to provide more fiscal support if needed.
With this in mind, it appears likely the RBA keeps its policy settings unchanged in August. Should the second wave of Covid-19 accelerate in the Sydney metropolitan area it may force the RBA to cut interest rates at a later date. However for now the RBA are expected to hold steady in the line of fire.
As a side note, for regular readers who took the long AUDNZD trade idea suggested here two weeks ago, todays RBA meeting and the release of the RBA Statement of Monetary Policy on Friday have the potential to disrupt the long AUDNZD trade idea.
As such, we recommend raising the stop loss from 1.0566 to just below the overnight low at 1.0715. If triggered this would result in a small profit or at worst a breakeven trade if stopped out. The initial target remains the June 1.0881 high and beyond that 1.1000/50.
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