Australian Dollar Could Fall Sharply if RBA QE Becomes 'Live'
Australian Dollar, Quantitative Easing’s Australian Prospects, Talking Points:
- RBA’s Lowe doubted this week that unconventional monetary measures will be necessary
- Westpac by contrast predicted that they will, by the middle of next year
- Someone is going to be wrong here and AUD markets will need to work out who
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The Australian Dollar is like all other assets dominated by US-China trade deal headlines, but this week a domestic issue likely to loom larger crept in even as those headlines hogged the limelight, one that traders will have to keep a very close eye on.
Monetary policy is the issue or, rather, its future conduct. The key Official Cash Rate is now at 0.75%, a record low, having been cut consistently since 2011. For all that stimulus results have been mixed. Employment growth has been impressive and durable, but that may now be waning. The inflation picture is much more worrying with annualized growth below the RBAs 2-3% target fairly consistently since 2015. At last look it was 1.7%.
Record Stimulus Has Not Meant On-Target Inflation
So, if record low interest rates can’t durably boost inflation, could the RBA turn to the sort of measures employed elsewhere since the financial crisis, such as quantitative easing (QE) and negative interest rates?
Reserve Bank of Australia Governor Philip Lowe spoke at a dinner in Sydney on November 26 and seemed to doubt it, or at least to imply that the barrier to such action was probably quite high.
‘There may come a point where QE could help promote our collective welfare, but we are not at all at this point and I don’t expect us to get there,’ Lowe reportedly said, while also calling negative interest rates ‘extraordinarily unlikely.’
However, not long after he spoke major Australian bank Westpac released a forecast which included two more interest rate cuts (which would take the OCR down to just 0.25%) by June 2020 followed by, yes, a program of QE. The lender agreed that barriers to such action were high. But its analysts feel that, given the probability that US rates will be heading lower, and that meaningful reductions in Australian unemployment may now be hard won, they will be surmounted in time.
Now of course someone is going to be wrong here. At present futures markets have moved quite aggressively to price in further rate cuts, one reason why AUD/USD has struggles since early November.
Any sign that markets are moving around to Westpac’s way of thinking could see the Aussie move very meaningfully lower. There will be even more pressure on it if it becomes clearer that the RBA itself is moving that way.
Australia avoided having to participate in the first wave of financial crisis QE but coming this late to the party with inflation below target and, say, unemployment firmly stalled, might not be a good look at all. Lowe and the RBA would probably like to see more fiscal stimulus before they are forced to go all-in on the monetary side. However, with S&P Global Ratings warning this week that the country’s prized AAA credit rating could be at risk if Canberra turns up the juice, there are risks on every side.
The Australian Dollar market has plenty of things to worry about besides US-China trade.
Australian Dollar Resources for Traders
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--- Written by David Cottle, DailyFX Research
Follow David on Twitter@DavidCottleFX or use the Comments
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.