AUD : Dovish RBA

(Tue, 20 Oct 2020). Overnight, RBA’s Kent had reiterated the message by the RBA Governor last week, that more monetary easing is on its way. RBA’s Kent highlighted the recent change in forward guidance from the central bank, that the committee wants to “actual” inflation sustainably in the 2-3% range before raising rates, as opposed to forecast inflation. This AIT (Average Inflation Targeting) lite version would suggest lower rates for longer. Alongside this, the Assistant Governor had also noted that while he cannot speculate on the details of further easing, one option is to buy longer dated bonds in order to supplement the 3yr yield target in place, raising the expectations that the RBA would expand the balance sheet. Perhaps the most interesting comment from Kent had been the acknowledgement that it is not impossible for the Bank Bill Swap Rate (BBSW) to move below zero, providing a subtle hint of warming to the idea of negative rates. That said, while negative rates are lower down the pecking order for preferred monetary tools, the dovish comments had been enough to weigh on the AUD/USD with the pair vulnerable to a move below 0.7000.

AUD/USD:

Risks remain tilted to the downside, markets remain slightly long of Aussie hinting at further downside as speculators flip net short. As such, as we move closer to the RBA decision, increased pricing in of further stimulus is likely to curb notable upside in the currency. On the downside, key support is situated at the psychological 0.70 handle where a break below puts 0.6950-60 in sight. Resistance resides at 0.7090-0.7100 with 0.7040-50 ahead. (Implied range based on option pricing: 0.7034-0.7098)

AUD/CAD TRACKING 10YR AU/CA SPREADS LOWER

As the RBA show a desire to push the long end yields lower, AU/CA 10yr yields spreads have increasingly moved in favour of the Canadian Dollar and thus a continued pullback in AUD/CAD can be expected. As the cross trades at its lowest level since May following the break below 0.9290, there is little in the way of notable support until the 200DMA situated at 0.9180. In turn, the cross remains bearish below 0.94 with bounces to be capped from 0.9350.

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