RBA reduces stimulus and boosts AUDUSD

The RBA has prepared the market for changes to its monetary policy settings tomorrow as it takes initial steps towards removing emergency stimulus measures. However, the overall tone is likely to remain dovish and more so in light of the uncertainty caused by a continued increase in new COVID19 cases and lockdowns in Sydney.

The three main points of interest will be as follows.

1. The RBA is not expected to extend its three-year “yield target bond” from the April 2024 bond to the November 2024 bond. A decision that is widely expected and will represent a gradual tightening of policy that seems appropriate following the rapid improvement in the economy.
   
   
2. Forward guidance will remain dovish. Specifically, the RBA will reiterate that the conditions to raise interest rates including inflation sustainably between the 2 to 3 per cent target rate is unlikely to be met until 2024 at the earliest.
   
   
3. QE is expected to continue after the current program of $100bn is complete in September, but potentially at a slower pace of $75bn per six months and with more flexibility.

The RBA’s framework including the stringent pre-conditions it has set, including reaching 3% wage growth, and inflation sustainably back to within its 2-3% target band is likely to keep the RBA at the back of the pack amongst developed market central banks to start hiking.

Music to the ears to the ASX200, after it completed Financial Year 2021 last week showing an index return of 27.8%, the strongest since Financial Year 2007.

In recent weeks consolidation has been noted as the ASX200 closed four of the past five weeks ~10 points either side of 7300. As such the view remains unchanged in that we hold a preference to buy weakness towards uptrend support in the 7100/7000 support area.

Source Tradingview. The figures stated areas of the 5th 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

The bank's forward guidance remained dovish. Specifically, the RBA reiterated that the conditions to raise interest rates including inflation sustainably between the 2 to 3% target rate and wages growth of 3% are unlikely to be met until 2024 at the earliest.

Reflecting the stronger than expected economic recovery the RBA took its first steps to reduce stimulus after the expiration of the bank's Term Funding Facility (TFF) on June 30 by not electing to extend its three-year “yield target bond” from the April 2024 bond to the November 2024 bond.

It 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 pace of purchases of $5 billion per week. It will reassess this decision in Mid-November.

Attention now turns to RBA Governor Lowes prepared remarks at 4.00 pm Sydney time that are expected to contain similar information to what was provided at the 2.30 pm meeting and details around which month, quantity, and bond yields the RBA will target under its new QE program.

What does it mean for the AUDUSD?

After a brief fall to .7544 after the announcement, the AUDUSD has rebounded to be testing the resistance coming from the 200 day moving average near .7570.

Should the AUDUSD break and post a couple of consecutive daily closes above .7570ish it would be an initial indication that a short-term low is in place at last week’s .7446 low and that the AUDUSD can rally towards .7700c.

Source Tradingview. The figures stated areas of the 6th 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