RBA joins coordinated liquidity boost with yield curve control RBA joins coordinated liquidity boost with yield curve control RBA joins coordinated liquidity boost with yield curve control

RBA joins coordinated liquidity boost with yield curve control

Summary:  As has been the resounding theme, monetary stimulus to date is too little, too late. And today was no exception as the ECB announced EUR 750 billion pandemic emergency purchase programme which has failed to boost sentiment in Asia today. Although stimulus packages may ease downside risks to the economy, for markets and community sentiment to really recover the onus will be on reduced COVID-19 transmission rates, increased immunity and a clear containment of the outbreak.


The news rolling thick and fast today, after another sell off on Wall Street, Asian stocks have continued the plunge. The sell-everything rout is taking hold in Asia. Multiple regional indices hitting circuit breakers, the Kospi halted after falling more than 8%, Indonesian stocks triggering limit down at 5% and Philipine stocks back online after the market was closed dropped 24% on the open trigguring a circuit breaker.

The dollar short squeeze rolls on with the rampant USD wreaking havoc on local currencies, dollar crosses making almost parabolic moves in some instances. The South Korean Won trading at the weakest level since 2009, USDMXN at a record high and the South African Rand weakening further in the Asia session.

Last but not least, collapsing 9% in the last 3 days, the AUD has outpaced GFC lows falling to levels last seen in 2002. This as risk aversion remains heightened, anything liquid is dumped and the dollar funding shortage exacebtates USD demand. The bid-ask spreads for the AUDUSD pair, a de facto measure of market liquidity, are widening – the liquidity squeeze as market participants dash for cash (USD!) is palpable. Notwithstanding the domestic outlook and the anticipation of the monetary easing package from the RBA delivered today which has weighed on the currency over the medium term.
Source: Bloomberg

Australia now reporting the largest surge in COVID-19 cases in a single day locally to date, looks set to join the US and Europe as a hotbed of COVID-19 cases. This as the government has moved to ban social gatherings of 100+ and urge against overseas travel and has today closed borders to all non residents. The services sector is set to bear the brunt of this hit to economic activity as sentiment is hit and consumers avoid crowded places and practice social distancing. Additonally the services sector will struggle as pent up demand is not likely to bring the sector bouncing back to life – who will eat out twice as much, book an extra holiday or double their coffee order? Particularly as once activity resumes, in some cases household balance sheets may have suffered a drawdown via job loss, unpaid leave etc. A stark image of how sudden this impact will be across multiple industries can be seen in the chart below which highlights the global plunge in restaurant bookings. In some countries this is down more than 90% YoY. A frightening imagery of the hit to economic activity and total collapse in demand that has come as countries around the world are placed on lockdown. For small businesses like restaurants, with high fixed costs like rent to pay this impact will be devastating. With many balance sheets not able to withstand the lockdown period.

Many SMEs will desperately need a lifeline to maintain wages, rents and other such payments that do not stop as economic activity grinds to a halt. The cash flow support will be vital in covering lost operating incomes and preventing layoffs. Allowing bussiness to provide goodwill payments to casual workers who lose shifts, extended sick pay for those unable to work and preventing layoffs for those businesses facing a material impact from the COVID-19 outbreak. So far the Australian government’s starter package is welcome, but insufficient. The size of the stimulus is peanuts relative to the 4% of GDP stimulus package outlined by the New Zealand government.

The Morrison government has today announced that another package will be introduced in the coming days. The government must move quickly and in size to prevent the cascading effects of economic shutdowns, liquidity issues and plunging share markets from sparking a deeper economic downturn.

The RBA Bazooka

All measures are broadly aimed at providing banks with cheaper funding and maintaining liquidity and market function.

The final historic move of the day, somewhat late to the party but putting up a good fight, the RBA have continued the spate of coordinated central bank action. The RBA have delivered on the last rate cut, taking the cash rate to a new record low 0.25%. The effective lower bound. That is effectively 50bps of rate cuts delivered in March. Accompanying this move with forward guidance explicitly stating rates would not be moving higher until the central bank sees progress on jobs and inflation back within the target band. Governor Lowe later saying that he expects the cash rate to remain at this level for “some years”.

The “whatever it takes” moment came later in the press conference as Governor Lowe stated, “Nothing is off the table with policy” and reaffirmed what many other central banks have said, that there are “no limits” when it comes to bond purchases.

The RBA also announced the commencement of Australian government bond purchases across the curve starting tomorrow, with the intent of yield curve control, aiming to maintain the 3-year bond yield at 0.25% and support liquidity in fixed income markets. These purchases will likely be extended out the curve with time. The move will reduce borrowing costs for lending priced off the 3-year yield.

The central bank has also enacted a term funding facility of at least $90 billion for the banking system at a fixed rate of 0.25%, this to encourage lending to otherwise solvent SMEs affected by the COVID-19 outbreak. A crucial measure in supporting the reduction of layoffs, and failure of otherwise healthy companies that will see their balance sheets temporarily hit. As we outlined above just because parts of the economy are shut down and demand has collapsed businesses still have to pay the rent and keep paying staff.

Disclaimer

Saxo Capital Markets (Australia) Limited prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments.Saxo Capital Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Capital Markets or its affiliates.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Limited
Suite 1, Level 14, 9 Castlereagh St
Sydney NSW 2000
Australia

Contact Saxo

Select region

Australia
Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Limited ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms, Financial Services Guide, Product Disclosure Statement and Target Market Determination to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation. The Target Market Determination should assist you in determining whether any of the products or services we offer are likely to be consistent with your objectives, financial situation and needs.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.

Please click here to view our full disclaimer.