The Door Is Opening For The RBA To Provide Stimulus Without A Rate Cut
Axi | Apr 28, 2017 13:21
Originally published by AxiTrader
If the RBA wants to provide some non-housing biased stimulus for the Australian economy it has the perfect opportunity in the week ahead to knock the Australian dollar lower.
That is, with the Australian dollar already falling under its own weight the RBA could facilitate that process a little further by signalling in the governor's statement Tuesday and Statement on Monetary Policy Friday that the door to more interest rate cuts is slightly more ajar than the market realises.
It's a neat trick we had a window into just last night.
Sweden's Riksbank was unexpectedly dovish extending its bond buying programme. That knocked its currency - the krona - down 0.8% against the US dollar. Likewise Mario Draghi's cautiousness about the outlook for inflation, even as he noted the improved economic outlook, was also read dovish by forex traders and helped knock the euro lower overnight. It's at 1.0872 this morning
It's an important pointer to what could be a potential course of action from the RBA at next Tuesday's meeting.
Already we know the RBA has concerns about the labour market and underemployment, low inflation, and moderate growth. We also know the bank is unlikely to cut if its policy action simply leads to further goosing of the housing market.
And we know from governor Lowe's last appearance before parliament in February that he doesn't see any point lowering rates if it just leads to more housing demand.
"While that, (a rate cut), would have some positive effect on the economy, the issue we are dealing with internally is how that would add to fragility. Household debt is at record levels. Is it really in the national interest to get a little bit more employment in the short term at the expense of encouraging that fragility?" governor Lowe said.
And he also said the economy would be better if the Australian dollar "was lower still".
Which is where the Riksbank and ECB lead come in.
If they were to follow the more dovish path and signal lower rates were a real possibility governor Lowe, and his board, can provide an economic stimulus for the Australian economy and put some much wanted upward pressure on inflation by driving the Aussie dollar down toward, and perhaps through, 70 cents.
RBA analysis in 2014 showed that "a permanent 10 percent real depreciation is estimated to increase the level of GDP by around 1 percent after two to three years and to increase year-ended inflation by ¼–½ percentage point over the same period".
It's one of the reasons why the RBA governor continues to say in his monthly statement after the board meeting "The depreciation of the exchange rate since 2013 has also assisted the economy in its transition following the mining investment boom. An appreciating exchange rate would complicate this adjustment".
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So my bet would be the RBA and its governor would like the Australian dollar lower to provide additional stimulus both now and in what could be an uncomfortable 2018 as the housing construction boom starts to unwind.
That opportunity comes at a time when the drivers of the Australian dollar are working against it.
Yes, the rally in risk appetite should support the Aussie. In fact, I think it is because if you look at how tight the Australian-US 2 year spread is, when you take into account the reversal in iron ore prices, and fall in the CRB index of commodity prices it's hard to make an argument the AUDUSD shouldn't be lower now.
It's equally hard to make the argument on the crosses the Aussie shouldn't be lower as well.
So the Australian dollar is under a little pressure and has a downward bias. In the next week the RBA could give it the nudge that drives this move back to the December/January lows below 72 cents.
Will they do it? I guess that depends on whether they think such a signal itself might get borrowers and buyers back into the housing market. Equally RBA board member Ian Harper's comments this week that the labour market is looking healthier means I might have misread the RBA.
Equally in my experience travelling the world and talking to big global investors and central banks, there is a point where the Aussie-US spreads gets so close they say why bother and exit the AUDUSD entirely. I've pencilled in the 20-30 region in the current environment. So at 36 points on a two year we might be getting close.
But there is a real chance that while Australia is unlikely to face any real economic challenges in 2017 in 2018 the economy could hit a flat spot. And that's when an Aussie dollar depreciation now might help.
Looking at the charts for AUD/USD we see it is currently still in a downtrend. My target remains the 0.7374/94 region short term.
Have a great day's trading.
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