RBA Preview

Macro 6 minutes to read

Summary:  The RBA board boards meets again next week, we discuss what to expect and how the actions might impact portfolios


RBA board meeting – what we know and what to expect

Governor Lowe hinted in a mid-October speech that there was a readiness on the part of the RBA to ease further as the economy continues upon the reopening trajectory with restrictions being wound back gradually and state borders beginning to reopen. With further policy easing gaining “more traction” as the economy continues to reopen.

Further, the board has conspicuously addressed unemployment as a “national priority”, this language around the labour market signalling an openness to ease again. In addition, in recent weeks, since Governor Lowe’s speech various board members have done anything but downplay now firmly entrenched market expectations.

Inflation data released earlier this week, despite rebounding, still remains well below the RBA’s 2-3% target band. Although there is likely to be ongoing volatility in price trends as the pandemic disrupts both demand and supply across various components, the data does not detract from the RBA’s delivery of further easing next week.

The Governor also indicated a growing sensitivity to A$ strength and longer dated yields. Flagging larger central bank balance sheet increases in other countries and the ACGB 10yr yield remaining high on a relative basis. Perhaps a nod to their trans-Tasman fellows at the RBNZ who have been more proactive in their policy responses. In addition, a recognition of the role a weaker currency could play in policy transmission. In our view this was confirmation of a shift toward outright quantitative easing with the intent of lowering longer dated yields. The market certainly agreed and over the past month these spreads have narrowed somewhat.

The Governor did flag the potential drawbacks to further policy easing centred around financial stability concerns, but went on to emphasise the near term risks to financial stability posed by labour market conditions and private sector balance sheets vs. the longer term concerns surrounding inflated asset prices and speculation. This aligns with the Fed communications suggesting there’s a trade-off coming between jobs and incentivising speculation in housing and financial markets. In that trade off, the winner for central banks is the labour market, alongside progress toward long-term objectives of full employment and meeting inflation targets.

As, we have previously outlined, taken together the commentary signals a readiness to continue to support the recovery with the tools available, via further easing of monetary policy - greenlighting the move on November 3, when the board next meets.

With little reason to wait, we expect at the next board meeting in November a 15bp cut in the cash rate, YCC target and TFF rate to 10bps and the announcement of an outright, open-ended QE package purchasing longer dated securities in the 5-10yr range, with the broad intent of lowering longer dated yields. The board could commit to open-ended purchases of securities with longer maturities until inflation has returned to target/labour market conditions are improved.

What does more easing mean for portfolios

Rate cuts support the property market at the margin, making housing more affordable, supporting both sentiment and demand.  However, 2020 is a year unlike any other. The jobs market will be key to the property market over the next year, alongside the stall in immigration which will place downwards pressure on prices. Higher unemployment and weaker economic growth therefore have the capacity to offset the impact of reducing interest rates. The effect of the pandemic also sees regional bifurcations, for example the Melbourne market, worst affected by the virus, will be weaker than other cities. But also, other trends are emerging post COVID as the shift to working from home allows people to live outside of the city in regional locales buoying certain regional markets.

For the equity market, continued policy easing from the central bank entrenches the ongoing search for yield. Investors continue to be pushed up the risk spectrum hunting for returns and savers are effectively penalised. This dynamic, all else being equal, supports the share market, particularly growth and quality stocks.

The shift toward an outright QE package has the capacity to accentuate these dynamics. We have seen in recent years as central banks around the world have increasingly adopted unconventional easing measures that QE works to inflate asset prices and not wages.

The other precipitous shift detailed an abandonment of policy orthodoxy, “putting a greater weight on actual, not forecast, inflation”, moving towards an AIT-esque regime. The RBA is joining the Fed in pivoting toward a monetary regime where the economy and inflation will be allowed to run hot in order to support inflation expectations. An inflationary environment, if achieved, supports commodities and hard asset investments. An inflationary regime with central banks continuing to pursue unconventional policy measures would also have implications for traditional weightings to government bonds within diversified portfolios, particularly with yields at a very low starting point. Suggesting that investors may be better off increasing weightings towards inflation-linked bonds, precious metals, base metals and agricultural commodities within diversified portfolios.

The central bank’s stance is not the only driver of the AUD, but all else equal, the enhanced forward guidance from the RBA and openness to ease policy settings further, places downward pressure on the AUD. This could see the AUD underperforming in the G10 FX space in anticipation of the next move from the RBA, however this local dynamic is already well known/priced.

In addition, for the AUD there are always other factors in play, like global risk sentiment, China sentiment and Yuan strength, and global commodity prices. There is also an added complication, as most central banks globally are pursuing aggressive policy easing, with the RBA somewhat behind the curve in this respect, relative to global peers – the outlier for the wrong reason with respect to currency strength (hence the move).

Over the past week with COVID fears and fresh lockdowns weighing, the US fiscal deal dead and the election drawing close the AUD has not been immune to fragile risk sentiment, particularly with the prospects of further easing from the RBA next week in the background.

In the near term, global risk sentiment, tightening restrictions in Europe and in particular the US election will continue to buffet the A$ with the added burden of the RBA’s dovish stance and incoming policy pivot. Clearly, a hurdle will be clarity surrounding the US election with little directional conviction ahead of election week, which entails heavy event risk, its likely to be more of the same choppy trade. However, once there is some certainty on the outcome of the US presidential race, we favour a resumption of the reflationary move for the A$ and view near term volatility as an opportunity, taking advantage of corrections to add to long positioning,

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research 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. To the extent that any content is construed as investment research, you must note and accept that the 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 under relevant laws.

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

Saxo Bank (Schweiz) AG
Beethovenstrasse 33
CH-8002
Zurich
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved, we have put together a general Risk Warning and a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed here or within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.