Will a cut and an increase in QE stifle the AUDUSD? – RBA Preview

Almost lost in the headlines of a resurgent pandemic and the U.S. election is next Tuesday's RBA Board meeting.

Charts (5)

After a series of dovish communique from the RBA, the expectation is the RBA will cut the cash rate from 0.25% to 0.1%, cut the 3-year bond yield target from 0.25% to 0.1% and cut the term funding facility rate from 0.25% to 0.1%.

Also expected, a change to the RBA’s bond purchase program (QE). The RBA’s QE program aimed to support the smooth function of the bond market following the onset of the pandemic and to anchor the 3-year bond yield to the RBA’s 0.25% target rate.

On Tuesday, this program is expected to be extended further out along the curve to include purchases of bonds with 5 and 10-year maturities aimed at lowering long end yields towards levels comparable in other developed markets.

In theory this will reduce foreign demand for Australian bonds and in turn reduce demand for the AUDUSD. A lower exchange rate helps to improve Australia’s international competitiveness by stimulating demand from offshore and help support domestic employment and inflation objectives.

There is some conjecture whether the RBA should set a specific quantity and timetable for the purchase program. The current market consensus is for around $100bn or about $8.5bn of purchases per month.

As this amount is likely already “priced in” it is likely to take a larger amount to wrest control of the AUDUSD’s fortunes from the pandemic and the U.S. election in the short term.

Technically, the corrective price action in the AUDUSD from the September .7414 high is now ending its eighth week.

Should the AUDUSD break/close below the support near .7000c the correction is expected to deepen towards wave equality support and the 200-day moving average .6840/.6800c area.

A pullback into the aforementioned support zone combined with signs of stabilization would be looked at closely for a medium-term AUDUSD buying opportunity. Keeping in mind a break/close above .7200c would be initial confirmation the uptrend has resumed.

Will a cut and an increase in QE stifle the AUDUSD? – RBA Preview

Source Tradingview. The figures stated areas of the 29th of October 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

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