For the first time in years the RBA caught the market slightly off guard. Not around what it did, but more around when it did it.
The Board’s decision to extend its quantitative easing program by a further $100 billion, is something most had expected it to do. The second tranche program will roll out at the close of the first tranche which could be as early as April 9. The issue was that it has announced the second tranche now, which certainly wasn’t expected, as the market has been conditioned to believe the RBA would foreshadow this move at the April board meeting and ‘confirm’ this was the case and start immediately.
This wrong-footing announcement saw Australian bond yields plummeting with the Australian 10-year falling like a stone down over 8 basis points. The AUD went from $0.7660 to $0.7615 and eased further – it is battling to hold onto the $0.76 handle and with the pressure of a falling iron ore price, it is unlikely to hold this level in our opinion.
What the RBA also signalled was that Australia’s cash rate is now ‘set’ until 2024. In fact, the statement suggests it could be longer than this noting that inflation would need to be ‘materially higher’ before rates could rise. Considering the RBA’s mandate for core inflation is 2% to 3% and it hasn’t been in this band since the third quarter of 2015 – 2024, maybe it is too short of a time frame.
It also puts a ruler through any idea that short-term inflation bursts will cause the RBA to raise rate prematurely. As nations come out of the COVID crisis with inflation rates that are coming from very low bases, inflation could ‘pop’ over a quarter or so. But the RBA is signalling it needs structural change – aka what the Federal Reserve is suggesting.
So, the RBA has shown it has some ‘pop’ in the RBA’s pop-gun policy arsenal, the caught is that it’s still too small for it to be sustained, and the Fed or ECB will run it over with similar packages of their own, which is something to watch out for.
This information has been prepared by Mitrade. In addition to the disclaimer below, Mitrade does not represent that the information provided here is accurate, current or complete, and therefore should not be relied upon as such. This information does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. Mitrade is not a financial advisor and all services are provided on an execution only basis. We advise any readers of this content to seek their own advice. Reproduction or redistribution of this information is not permitted.
Derivatives trading involves risks and the above information is not suitable for everyone. Refer to our PDS and ensure you understand the risks involved.
The content presented above, whether from a third party or not, is considered as general advice only. This article does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Mitrade does not represent that the information provided here is accurate, current or complete. Mitrade is not a financial advisor and all services are provided on an execution only basis. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks. *CFD trading carries a high level of risk and is not suitable for all investors. Please read the PDS before choosing to start trading.