Delta spread to see RBA pause tapering sending AUDUSD to fresh cycle lows

As new COVID-19 case numbers remaining stubbornly high, lockdowns will likely be extended in Greater Sydney and possibly Victoria. NSW and Victoria account for the lion's share of Australian GDP and employment.

This will likely see Australian Q3 GDP slide into negative territory, even after allowing for some bounce back into the end of Q3, following the re-opening and State and Federal government support for individuals and businesses unable to work.

A significant, although not wholly unexpected, turn of events since the RBA's Board meeting in early July, the minutes of which are released tomorrow at 11.30 am.

To recap, at the RBA’s Board meeting in July, forward guidance remained dovish. Its central scenario is that the conditions for lift-off for rates 'will not be met before 2024'. Reflecting the stronger than expected economic recovery, the RBA elected not to extend its three-year "yield target bond" from the April 2024 bond to the November 2024 bond.

The RBA also announced a more flexible approach to its latest QE program after the current program of $100bn is complete in September, reducing the pace of purchases to $4 billion a week from the current rate of purchases of $5 billion per week, and to reassess this decision in Mid-November.

Looking to tomorrow's Minutes, the market will pay close attention to any debate around the decision to signal a taper in the QE program, as well as any discussion around changing the forward guidance around the cash rate. That said, given the extensive communications from Governor Lowe following July's meeting, the Minutes are unlikely to provide any new information.

Succumbing to the deteriorating domestic COVID-19 situation and following a weak lead from Wall Street on Friday night, the ASX200 has started the week on the backfoot to be trading near 7285.40, -62.7 points (-0.85%).

Should the ASX200 break below range lows 7220/00 area, we retain a preference to buy the ASX200 towards uptrend support coming in 7100/7050 area.

Source Tradingview. The figures stated areas of the 19th of July 2021. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

This morning release of the minutes from the RBA's July Board meeting, where it announced a tapering of QE, showed an emphasis on flexibility around its decision to taper.

Given the high degree of uncertainty about the economic outlook, members agreed that there should be flexibility to increase or reduce weekly bond purchases in the future, as warranted by the state of the economy at the time.

The inclusion of this guidance combined with the ongoing risks around the spread of the Delta variant into other states of Australia appears likely to see the RBA reverse its July tapering decision at its August meeting.

Instead the RBA is expected to continue QE bond purchases at a pace of A$5bn/week once the current tranche ends in September, before ultimately starting to taper in November 2021.

The likely postponement of tapering has provided another blow to the AUDUSD, already under pressure from a resurgent US dollar, a sharp deterioration in risk sentiment, and lower commodity prices.

Technically, following Monday's break and close below critical support .7420/00 area, the AUDUSD appears at risk of a deeper correction towards .7200c and possibly towards medium term support .7020/.6990 area (coming from several lows in September and November 2020).

Recent lows in the .7400/20 area should provide initial resistance, with a break and consecutive daily closes above the 200-day ma at .7584 needed to indicate the correction is complete, and the uptrend has resumed.

Source Tradingview. The figures stated areas of the 20th of July 2021. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation