AUSTRALIAN DOLLAR FUNDAMENTAL OUTLOOK: BULLISH
- Australian Dollar[1] may rise on RBA rate decision and economic stabilization
- Resilient risk appetite, support from central banks may amplify AUD’s gains
- Having said that, escalating tension with China could curb the Aussie[2]’s rise
RBA Rate Decision: What to Expect
At the last RBA rate decision on August 4, officials chose to hold the overnight cash rate at 0.25 percent and maintained that same yield target for 3-year sovereigns. About two weeks later, officials said they are prepared to adjust the stimulus package if the circumstances warranted it. Policymakers added that additional fiscal and monetary support may be necessary for some time.
Having said that, RBA Governor Phillipe Lowe stated that “The Australian economy is going through a very difficult period and is experiencing the biggest contraction since the 1930’s. As difficult as this is, the downturn is not as severe as earlier expected and a recovery is now underway in most of Australia”. To see the full text, visit the RBA site here.[3]
Consequently, if these unexpected signs – albeit uneven and “bumpy” – of economic improvement continue to manifest, the urgency to introduce additional stimulus may wane. This may then push AUD higher if investors focus on swift recovery expectations. Having said that, heightened geopolitical tensions between Australia and China[4] could cap the currency’s gains if rhetoric mutates from words to written policy.
Economic Stabilization
As the statement by RBA Governor Phillipe Lowe states: “The outlook remains highly uncertain. The recovery is expected to be only gradual and its shape is dependent on containment of the virus”. For Australia, this is a somewhat gloomy message as the country re-imposes aggressive lockdown measures to contain a flare-up of Covid-19.
