Morning Commentary: Technically True

Foreign Exchange - Morning Commentary
Technically True
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Andrew Kositkun
Andrew Kositkun
Foreign Exchange Head Trader
Later this week, Australia will release its Q2 GDP data.  Most likely, this print will make official the largest quarterly contraction in Australian history and mark the first technical recession in Australia since 1991.  With the Victoria lockdown likely to push Q3 into negative numbers, market focus has begun to shift towards the trajectory of growth in Q4. 

For the Reserve Bank of Australia’s (RBA) part, the bank has remained focused on the consumer as it is the largest component of GDP.  Looking forward to 2021, a key risk will be a sharp decline in household spending as government support programs unwind and private investment remains weak.  This makes the labor markets a key factor to assess as it provides a good proxy for the extent to which the Australian economy can recover in the post-pandemic world.

More immediate is the RBA’s next meeting tonight.  The bank is widely expected to hold rates and its unconventional package of policies unchanged.  With case numbers falling in Victoria, the national economic reopening appears on track for Q4. 

But what could cause the RBA to change its policy?  Most likely, it would take a broad increase in virus cases that prompts more lockdowns or a global shock to the global financial markets.  Should this be the case, here are some possible actions the bank could use.

Rate cuts: The bank has indicated it is prepared to take the cash rate/3 year target down to 10 bps to further ease conditions as needed.  A small but positive deposit rate should help ease some of the costs in a low interest rate environment. 

Asset buying: The RBA resumed bond purchases in August after stopping in May.  The most recent round was to defend its 3 year target (YCC) and reinforce forward guidance.  However, the bank could use asset purchases for other approaches. 

Negative rates: Technically this is possible, but the bank continues to show opposition to negative rates, describing them as “highly unlikely.”


Overall, expect the RBA to remain focused on financial stability and ensuring access to cheap capital as conditions remain challenged.  Rising deposits could be a leading indicator of strong spending power over time.  For now, however, it likely represents demand for safe assets such as cash.   
HERE ARE THE KEY NEWS STORIES FROM OVERNIGHT:
  • US Phase 4 stimulus talks remain at a stalemate.  Reports indicate that House Speaker Pelosi and the White House Chief of Staff spoke over the phone but no concrete progress has emerged. 
  • EU trade commissioner Phil Hogan was forced to resign after attending a golf event with 80 other people, violating Ireland’s COVID-19 restrictions.  This development only serves to further muddy the waters on EU trade talks.  
  • In Japan, Chief Cabinet Secretary Yoshihide Suga is reportedly entering the race to succeed Shinzo Abe as Japan’s next Prime Minister.  Should Suga enter the race, he would be considered among the top choices. 
  • ByteDance may need Beijing’s approval to sell TikTok’s US operations under China’s new rules around the export of artificial intelligence.  TikTok’s algorithm on predicting consumer behavior provides much of the app’s appeal to potential bidders. 
  • Chinese PMI data continues to show the economy recovering as both the manufacturing and non-manufacturing gauges both remain in expansionary territory. 
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