Reserve Bank of Australia expected to backflip on tapering as lockdowns hit economic outlook

When is the Reserve Bank of Australia (RBA) meeting next? The RBA will meet on Tuesday, 3rd August at 2.30pm.

The economic data that matters

Source: Bloomberg

What is the market expecting from this RBA meeting?

A month is a long time in monetary policy when in a pandemic. After July’s apparent hawkish policy pivot, whereby the RBA started to outline a path to policy “normalisation”, the recent outbreaks of the Delta variant of the Covid-19 virus in Australia, and subsequent lockdowns, especially in New South Wales, has set the stage for a policy backflip from the RBA. With the Australian looking at a quarter of negative growth as a result of lockdowns, and possibly a double-dip recession, the RBA is likely to announce a reversal of tapering plans, and possibly increased stimulus, to support the economy through its imminent slowdown.

Three questions for this RBA meeting

What will the RBA do with its QE program?

After announcing a reduction in its quantitative easing (QE) program last month, which would have seen bond purchases reduced from $5 billion to $4 billion per week, the RBA is all but certain to reverse the decision, in order to maintain liquidity during the expected slow down in the Australian economy. Not only that, but several high profile forecasters, chiefly Westpac’s economics team, have suggested the RBA ought to increase its bond buying to $6 billion per week. Though it’s a matter of debate how impactful such a move will be, it’s likely at the very least RBA will want to be seen to be “doing something” in response to the latest crisis, in order to sure up public and market confidence.

What’s the expected economic impact of the latest lockdowns across Australia?

Given the expected backflip on policy from the RBA, the markets will be looking to the central bank to provide updated economic guidance, that will quantify the expected impact of the latest lockdowns on future growth. Although fresh forecasts from the private sector haven’t been fully updated, the most up to date estimates for GDP growth for the Australian economy for the next quarter have already been downgraded to 0.4% from 0.9%, while estimates for the unemployment rate has been revised up to 5.1% from the current 4.9%, according to data compiled by Bloomberg.

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Could the RBA extend its YCC target bond?

Perhaps the nuance of greatest contention at this meeting is whether the RBA will also reverse its decision not to extend its target bond for its yield curve control program. At its July meeting, the central bank opted not to shift the target to the November 2024 bond, from the April 2024 bond, choosing instead to provide itself policy flexibility given the potential of a cash rate increase in that year. With the Australian economy possibly moving towards another recession, and the market erasing expectations of a rate hike at the end of 2022 in recent weeks, the RBA may wish to anchor expectations by targeting a 0.1% for the November 2024 bond.

How could the RBA meeting impact the AUD/USD?

The fortunes of the AUD/USD probably hinge on what the RBA does with its QE program. The market has probably already priced-in a backflip on the central bank’s tapering program. However, it’s unlikely that the market has discounted an increase in the QE program, at least entirely.

From a technical standpoint, the AUD/USD looks in a very vulnerable position in the short-term. The pair’s post-pandemic uptrend has broken down, largely due to concerns about a top in the global economic cycle and a resurgent US Dollar. The key levels to watch in the short-term are, on the upside, is resistance at 0.7420, where the pair’s 20-day MA also currently sits, while on the downside, 0.7290/0.7300 proved the most recent low and will be a noteworthy level of supprort.

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