RBC kicks us off:
AUD: The RBA left its policy targets unchanged, as expected. Against expectations, however, it extended its QE programme, adding an additional AUD 100bn of purchases after the current programme ends in mid‐April. Expectations had been that the RBA would delay a decision until March or April and could taper purchases at that point. As expected, the RBA revised its growth forecasts up, but it added a new line to the statement, saying that the exchange rate has appreciated and “is in the upper end of the range of recent years”.
MUFG says fight the RBA:
The Australian dollar has weakened modestly overnight following the latest RBApolicy update. It has resulted in the AUD/USD rate falling back towards the 0.7600-level. At the same time the Aussie has extended its recent underperformance against the kiwi resulting in the AUD/NZD rate falling back towards the 1.0600-level. Aussie has clearly lost some upward momentum at the start of this year following strong gains at the end of last year. The Australian dollar strengthened by almost 10% against the US dollar between November and December. We continue to view the recent pullback for the Aussie and global equity markets as a short-term correction rather than the start of a more sustained reversal lower. We remain optimistic that the strengthening outlook for global growth and continuation of loose global monetary and fiscal policies will create a supportive environment for higher commodity prices and a stronger Aussie in the year ahead (click here).
At best the RBA’s decision to extend their QE programme overnight by a further AUD 100 billion will put a dampener on further gains. The new purchases will extend the QE programme until September after it had been due to expire at the end of April. The pace of purchases is expected to continue at an announced pace of AUD5billion/week. TheRBA initially started the QE programme in November by announcing a similar AUD100 billon of purchases. Since the QE programme has been running the Aussie has strengthened significantly highlighting that extending the programme is unlikely to prevent further gains on its own, although some have argued it would have strengthened even more alongside higher commodity prices without RBA action. Governor Lowe now views the exchange rate as “in the upper end of the range of recent years”.
Despite RBA intervention, 10-year yields in Australia remain amongst the highest within the G10 space. The 10-year government yield remains close to recent highs at 1.15% having been as low as 0.74% in early November. The yield on the 5-year government bond though has risen more modestly by around 16 basis points since the November lows resulting in a steeper curve. The RBA also attempted to keep downward pressure on short rates by reiterating that it still does not plan to raise rates until 2024 at the earliest despite the stronger than expected economic recovery which prompted material downward revisions to the unemployment rate forecasts(6.0% at end of 2021 & 5.5% at end of 2022). The overall message from the RBA is that it will be slow to tighten policy as the economy recovers. To do otherwise while other major central banks are still easing would encourage an even stronger Aussie.
Citi likewise:
Fade RBA dovishness.
As CitiFX Strategy’s Osamu Takashima outlines in RBA: Not a tough headwind for AUD, the RBA kept the base rate unchanged and the 3ybond yield target at 0.10%, as broadly expected. No change with the parameters of Term Funding Facility (TFF), but the RBA announced it would purchase an additional AUD100bn of bonds issued by the government and states and territories when the current purchase program is completed in mid-April. Though the LSAP extension has been market consensus, this earlier decision is a dovish surprise, which is depressing yields as well as AUD.
As mentioned in“RBA Preview: buy the dip on dovish RBA”, we expected a rather dovish outcome at today’s meeting, but we remain structurally bullish with AUD and noted in the preview a dip after the meeting will provide good opportunities to build AUD longs. The outcome today does not change this view.
Credit Agricole is more circumspect:
Our inflation strategist expects headline CPI inflation to leap to 3%in Q221. While the spike would be driven by temporary factors and thus could be ignored by the Fed, it could nevertheless trigger an ‘inflation tantrum’ in Q221 amidst growing inflation expectations and growth optimism supported by aggressive fiscal stimulus and better control over the pandemic. This could subsequently result in higher USTyields,a steeper UST yield curve,a stronger USD and higher FX vol.
The re-accelerating US CPI has taken the markets by surprise in recent months and could continue to do so in the coming months on the back of powerful annual base effects in commodity prices that should peak only in Q220. Our historic analysis of the impact of previous episodes of significantly positive US inflation surprises on the USD index and FXvols suggests that there has been a lead-lag relationship with inflation of around six months.
The above would imply that the current very positive US inflation surprises could point at upside risks to both the USD and FX volsin Q220.We think that the positive impact would further depend on the reaction in long-term UST yields and the slope of the UST yield curve (measured here with UST 2s10s). The combination of accelerating inflation and stabilising growth in the US could give rise to market taper speculation that could push UST yields higher and trigger a bear steepening of the UST yield curve.
In turn, this could weigh on risk sentiment, boost the USD and fuel FXvolatility. Our FX sensitivity analysis further highlights that the likes of the AUD, the GBP and the CAD could be the most vulnerable, while the JPY and the CHF could be the least vulnerable to any spike in risk aversion on the back of tightening US financial conditions. Their vols could rebound further, consistent with a seasonal pattern of short-dated USD-vol spikes in March and May.
I am not concerned that inflation is about to sustainably return. But the short-term base effect rise could also pop the stock market tech bubble as value rotation accelerates. So it is not to be discounted as an FX driver along the above lines.
My own view is that yesterday’s RBA statement was the most dovish EVER by a very long way. In fact, it was the most dovish statement by any central bank that I have ever read. No rate hikes four 3-4 years decreed in advance?
So, I’m lowering my Australian dollar outlook again. I already see China slowing in H2 and iron ore falling materially. Really, since China kiboshed coal, it is the only commodity that matters to the trade balance.
Yes, the AUD will probably still move higher from here as global growth booms but I now think it will struggle to even reach the 2018 high in the 81s.
