This week’s Reserve Bank of Australia (RBA) interest rate decision was closely watched by market participants. Many expected the RBA to address the strength in the Australian Dollar (AUD), giving the steady rise against USD, NZD, and even the JPY.
Yet, the RBA remained calm and did not alter the outlook. After all, judging by the inflationary target it has, the Consumer Price Inflation does not warrant any intervention. Deflation threatens to undermine all the RBA’s efforts, but many investors fail to see the strength of the AUD sustainable under such low inflation.
No Change of Monetary Policy from the RBA
The RBA did not change anything in its monetary policy outlook yesterday when it announced its decision. It kept the target for the cash rate and the yield on 3-year Australian government bonds unchanged.
What is interesting is that the RBA did engage in bond-buying programs after the coronavirus outbreak. However, its efforts are dwarfed by other G10 peer central banks. It feels like the RBA fears of the secondary effects on the Australian economy.
However, some arguments for the RBA reluctance exist. And this means some pros for the Australian Dollar’s strength.
First, the coronavirus outbreak seems to be better handled in that part of the world. I am not talking about Australia only, but the entire South Pacific area has far fewer cases than, say, Europe or the United States.
Second, some countries in Asia are the only ones in the world to experience economic growth in 2020. For example, China, Taiwan, or Vietnam are forecast to grow this year. Why? Because they better-handled the coronavirus crisis.
Or these are important markets for Australian export. A big chunk of the Australian exports goes to China and in the region. If China grows, that’s good news for the region and for its main trading partners – Australia among them.
Which means that this is good news for the Australian currency too. In fact, the AUD is one of the star performers of the FX dashboard during the coronavirus crisis. It rose against the USD to reach 0.72 from 0.55, for instance. Many will argue here that it is the USD weakness that is responsible for such strength in the currency pair.
However, one cannot ignore the resilience of the Australian economy and the better than expected economic outlook in the region. Hence, the Australian Dollar will continue to be supported on dips.