The RBA, COVID-19, and the Aussie Dollar

The RBA left monetary policy unchanged this morning, which had been widely anticipated by the broader market. The Board decided to leave the targets for the cash rate and the yield on 3-year government bonds at 25 basis points.

While monetary policy was left unchanged, the RBAs view of the economy and recovery was of interest. Even more so since the rising number of COVID-19 cases in the country and new lockdown measures taken in Melbourne.

Yesterday, news hit the wires of Australia shutting down the border between Victoria and New South Wales.

When considering the RBA’s reliance on consumer spending to drive the economic rebound, the latest news is alarming.

The RBA Rate Statement and the Aussie Dollar

From the RBA Rate Statement this morning, salient points included:

  • The Bank has not purchased government bonds for some time but is prepared to scale up purchases.
  • Authorized deposit-taking institutions continue to draw on the Term Funding Facility, with total drawings to date of A$15bn.
  • Economic conditions have stabilized and the downturn has been less severe than earlier expected.
  • Retail spending has picked up in response to the decline in infections and easing of restrictions.
  • The nature and speed of the economic recovery remain highly uncertain, however.
  • This uncertainty has led to caution amongst households and businesses, which could further dampen the speed of any economic recovery.
  • Importantly, the Board is committed to support jobs, incomes, and businesses and to make sure that Australia is well placed for the recovery.
  • Also, the Board will maintain this accommodative approach for as long as needed.
  • The Board will not increase the cash target rate until progress is made towards full employment and it is confident that inflation will be sustainable within the 2-3% target band.

In response to the hold and comments within the rate statement, the Aussie Dollar jumped to $0.69699.

With negative sentiment towards COVID-19 and the latest border shutdown, the upside was brief. At the time of writing, the Aussie Dollar was down by 0.10% to $0.69659.

There was no evidence of alarm from the statement over the latest border shutdown. When considering the uncertainty over consumer and business spending, this could become an issue in the coming weeks…

AUD/USD 07/07/20 Daily Chart

What Lies Ahead?

Ultimately, the markets and the Aussie Dollar have been here before. As the likes of the FED continue to plow money into the system and governments deliver fiscal support, hopes are that the latest spikes are just blips.

In reality, however, the very fact that the numbers of new COVID-19 cases are hitting new daily highs must be a concern.

Governments and central banks have delivered plenty and some may have little left to offer. That does, therefore, suggest that the worst is yet to come.

Optimism has continued to drive demand for riskier assets. May and June’s economic indicators supported that view to a point. Compered to pre-pandemic levels, however, some key economic indicators remain deep in the red.

A 2nd wave would likely cause far greater economic devastation. The reason simply being that consumers, if not governments, would be far more cautions a 2nd time around.

For the Australian economy, this would have a far more adverse effect than on manufacturing-sector driven economies. Though, in the event of a 2nd wave of lockdowns, few economies would be able to avoid another meltdown. With the influence of commodity prices on the Aussie Dollar, it would be a double blow… Back in March, we saw the Aussie Dollar back at sub-$0.60 levels.

If the U.S continues to battle against China over HK and trade, things could deteriorate quite rapidly.

For now, the RBA’s optimism is good enough to deliver support and optimism. If the spread of the virus does continue, however, expect the Aussie Dollar and commodities to take a dive.

When considering the state of the global economy, an Aussie Dollar on the cusp of $0.70 levels looks rich with risks tilted to the downside…