by Chris Becker
The Australian dollar had a rollercoaster ride following the RBA’s hold on interest rates yesterday at its latest board meeting, with FX markets pushing the Pacific Peso around the 69 handle after a recent strong uptrend (rising black line), culminating in a break of that level before a swing and a miss to be at a new daily low at 69.30:
This all hinges on what the RBA is going to do in response to a ballooning government deficit – now expected to be above $240 billion according to Westpac – and the effect on an expensive currency on the broader economy as the COVID-19 crisis refuses to go away. The Aussie has been on a tear since hitting the 57 cent low mid March before the RBA announced its first ever QE program, which paradoxically caused a near 25% rally as it hit 70 cents in early June:
Bill Evan’s at Westpac is more cautious than the slightly changing downward trajectory in the RBA’s forecasts, which precipitated the fall in Aussie overnight, particularly in the medium term as the Victorian lockdown looms, but still contends the RBA will sit on its hands:
We assess that the Bank expects it is extraordinarily unlikely to see the need to adjust policy settings in 2021.
The unemployment rate in the base case is forecast to be six and a half per cent by June 2022 – down from nine per cent in December 2020.
That nine per cent is likely to be reduced (Westpac is currently at eight per cent) reflecting the “less severe” near term conditions but I would be surprised if the Bank has seen enough evidence around the growth risks to lower the base unemployment forecast in June 2022, particularly given the Governor’s understandable caution around the virus both domestically and internationally.
Growth through to December 2020 is also likely to be revised up from minus six per cent to nearer Westpac’s forecast of around minus four per cent.
But that will be largely offset by a considerable reduction in the 2021 growth forecast of six per cent (Westpac’s forecast is three per cent).
Evidence that the Bank may adjust its 2021 forecasts downwards comes through the Governor’s observation that “As some businesses rehire workers as demand returns, others are restructuring their operations”.
Of considerable interest will be the Bank’s assessment of the level of activity in the economy by end 2021 relative to the end of 2019. Current forecasts are for activity to be only around 0.4 percentage points below that level. Westpac is more cautious at around 1.2 percentage points but both estimates will have activity more than five percentage points below trend over those two years.
As for the direction of the Aussie for the rest of 2020? Westpac reckons it will lift past 72 cents by December and hit 76 cents by the end of 2021. But doesn’t expect the RBA to try to do anything to push the currency down, but may have to step in if the Scomo government pulls the pin on JobKeeper or reduces fiscal measures in a vain (and stupid) attempt to bring the ballooning deficit under control.