The Reserve Bank of Australia starts QE for the first time in history
I suggested at the end of February that the Aussie should be falling faster after the AUD/USD bears broke out the support at 0.657-0.6575, but I didn’t think it would be so fast. Aussie is down versus the US dollar to the lowest levels since 2002, having lost about 18% of its value, and it featured the worst drop since the world economic crisis of 2008 in the week ended March 20. Australia averted the 2008 crisis through joined efforts Australia’s government and central bank. Now, Australia is about to slide into a recession for the first time since 1991.
Unlike other countries, Australia’s economy stayed afloat 12 years ago due to the combination of fiscal and monetary stimulus, the fiscal stimulus was about 4% of the GDP. The RBA cut interest rates by 425 basis points. Now, the RBA can’t afford something like this, as the interest rate had been already record-low before the coronavirus outbreak started. The central bank had to cut the rate even deeper, down to 0.25% and launch QE at the same time. Unlike the Fed and the ECB, which announced to buy a certain amount of government securities to keep yields down, the Australian central bank announced the unconventional approach. Like the Bank of Japan, the RBA is going to target a three-year bond yield, trying to keep is at 0.25%.
The decision of Philip Lowe and his colleagues reassured the local bond market and supported the AUD/USD bulls. It is typical in recent times that the monetary expansion supports the local currency. That is was so with the US dollar, the euro, the pound, and now, the Aussie is supported by the central bank. This is not a natural reaction of the market based on the economic theory, however, investors operate now in a situation that is far from being normal. Everybody is now trying to save their capital, rather than to increase it.
Dynamics of Australian government bond yields
Australia is following the path it used 12 years ago. Following the monetary stimulus, there will be launched the fiscal stimulus. Australia’s government will expand on the A$17.6 billion program announced earlier. It will hardly allow Australia to space the recession. According to BofA Merrill Lynch, global GDP won’t grow this year, China’s GDP will expand by just 1.6%, and the USA and the euro area will slide down into a recession. Having close trade links with China, Australia will suffer the most from trade wars and the coronavirus outbreak. However, as the epidemiological situation improves in China, Australia’s key trade partner, the AUD/USD trend may reverse up in the second quarter.
Of course, there will be more negative economic reports in China, following the weak reading of China’s industrial production and investments. Nonetheless, without the second wave of the epidemic, the Chinese economy will start a V-shaped recovery in the April-June period already. In my opinion, one shouldn’t rush to buy the Australian dollar right now. We shall consider purchases when the AUD/USD is back in the range of 0.59-0.62.
P.S. Did you like my article? Share it in social networks: it will be the best “thank you” 🙂
Ask me questions and comment below. I’ll be glad to answer your questions and give necessary explanations.
- I recommend trying to trade with a reliable broker here. The system allows you to trade by yourself or copy successful traders from all across the globe.
- Use my promo-code BLOG for getting deposit bonus 50% on LiteForex platform. Just enter this code in the appropriate field while depositing your trading account.
- Telegram channel with high-quality analytics, Forex reviews, training articles, and other useful things for traders https://t.me/liteforex
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.