RBA extends low rate horizon at May meeting

Research Strategist

May 5, 2020

There was modest selling in AUDUSD after the RBA meeting this afternoon, when it was announced historically low rates are here to stay over a long horizon.

15-min chart: AUDUSD saw modest selling on the RBA announcement at 14:30 AEST. Chart source data: Metaquotes MT5

The RBA extended the lifetime of historically low rates this afternoon, announcing the board will not raise the cash rate target until there is confidence the labour market is returning to full employment and that inflation will sustainably remain in the 2 - 3% target band.

An expanded horizon for a cash rate of 0.25% was a dovish addition to the RBA’s outlook. Holding rates at historically low levels until these two requirements are met expands the horizon until rates will rise. Unemployment is expected to peak at 10% in the coming months and could remain above 7% even at the end of 2021. It could be years until the RBA has confidence Australia is moving towards full employment, estimated at 4%.

Inflation is unlikely to reach the target 2% - 3% band for some time yet. Q2 CPI is expected to print negative in June, mostly due to tumbling oil prices and the introduction of free childcare. The RBA sees inflation rising to 1% - 1.5% in 2021 before slowly rising from there.

The statement had a few other dovish points, including: broadened collateral for open market operations and a willingness to increase asset purchases if needed.

A big part of the AUD outlook now comes down to central bank divergence: who is the least dovish? The RBA’s asset-purchasing program is certainly less aggressive than that of the Federal Reserve or the Bank of England. Then next door in New Zealand, RBNZ Governor Adrian Orr recently left the door open to negative interest rates. This has seen increased divergence between the AUD and NZD. AUDNZD is trading today at 1.0630 after lows of 1.00 in March.

Despite a bearish RBA announcement, AUDUSD technicals remain bullish. In yesterday’s session, the 20-EMA (blue) crossed above the 50-EMA (purple) while the daily candle shaped up as a bullish hammer. The bullish signals propelled this morning’s rally. AUDUSD is now testing the 5-EMA. Closing above here will strengthen a short-term bullish bias.

Daily chart: AUDUSD technicals look bullish: the 20-day EMA (blue) has crossed over the 50-EMA (purple), while a hammer candle appeared on the daily chart yesterday. Chart source data: Metaquotes MT5.

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