RBA to hold steady in the line of fire AUDNZD

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.

Charts (3)

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.

RBA to hold steady in the line of fire – AUDNZD

Source Tradingview. The figures stated areas of the 4th of August 2020. 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

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.