James Hyerczyk
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The Australian and New Zealand Dollars are trading slightly better on Wednesday as traders await the release of the latest Reserve Bank of Australia (RBA) interest rate and monetary policy decisions. Traders expect central bank policymakers to leave interest rates unchanged and to walk back its plan, announced on July 6, to begin tapering its stimulus, due to protracted COVID-19 lockdowns.

At 03:00 GMT, the AUD/USD is trading .7365, up 0.0003 or +0.04% and the NZD/USD is at .6991, up 0.0018 or +0.26%.

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RBA’s July Policy Meeting Recap

On July 6, the RBA took its first step towards tempering its massive stimulus as employment proved far stronger than previously expected, although actual rate hikes remain a distant prospect.

Central bankers held the cash rate at a record low 0.1% in a widely expected move and reiterated the need for the setting to remain unchanged until 2024 to help spark wage and inflation pressures.

It also retained the April 2024 bond for its three-year yield target of 0.1%, as expected, and announced a third round of its quantitative easing program albeit at a size smaller than the previous two rounds.

The adjustments to the RBA’s quantitative easing program and its commentary prompted markets to view the decision as hawkish with the Australian Dollar jumping nearly 1% to 0.7599. Furthermore, the financial markets priced in the risk of a rate rise in late-2022.


COVID Headwinds Expected to Force RBA to Curtail Tapering Plans

The RBA will release its latest monetary policy rate statement and interest rate decisions at 04:30 GMT on Tuesday. Due to the resurgence of the coronavirus, which has led to lockdowns and restrictions, while raising concerns over a potential contraction during the third quarter, some investors feel that central bank policymakers may be forced to walk back their plan to begin tapering its bond purchases announced on July 6.

Lowe is expected to put off until later in the year plans to scale back weekly bond purchases, while keeping the cash rate at 0.1% on Tuesday. That’s the view of a large majority of 18 economists surveyed by Bloomberg last week. Two of them went a step further and flagged the risk of the bank also extending its three-year yield target to the November 2024 bond.

Up until the latest outbreak, Australia’s economy had been on track to achieve the RBA’s goal of unemployment around 4%, the level RBA Governor Philip Lowe hoped would spur faster wage growth, and stable inflation in the RBA’s 2-3% target range.

However, with the resurgence of COVID-19 infections, the likelihood of another contraction is strengthening. This is also leading some economists to issue dire forecasts.

“Commonwealth Bank of Australia and Westpac Banking Corp., the nation’s top lenders, expect 200,000-300,000 jobs to be lost and unemployment to climb as high as 5.7% from the current 4.9% due to the outbreak. Both expect much of those losses to be recouped once the outbreak is contained and as vaccinations ramp up,” Bloomberg reported.

Daily Forecast

The recent price action and the COVID lockdown headlines suggest that the RBA decision has been priced into the market.

On July 6, the AUD/USD jumped to .7599 following the hawkish RBA announcement. At the close it was at .7483. This eventually led to a break to .7290. Currently, it is trading at .7365. This suggests the news has already been priced in.

Basically, traders have erased the price action on July 6 and are now focusing on the potential damage to the economy from the resurgent COVID virus. Traders are also focusing on Friday’s U.S. Non-Farm Payrolls report that could set the tone in the market for weeks.

For a look at all of today’s economic events, check out our economic calendar.
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