The Australian dollar fell against almost all of the most-traded currencies today with the exception of the New Zealand dollar. The main reasons for the decline were the negative market sentiment and the dovish outlook for the monetary policy of Australia’s central bank.
Markets were rattled by the unprecedented move of prices for North American crude oil below $0. Analysts were quick to point out that the move was in the May contract that expires today, making traders desperate to get rid of it. Nevertheless, the June contract logged substantial losses too as demand for crude plummeted after the COVID-19 outbreak and the storage capacity in the United States is nearing the limit.
Meanwhile, the Reserve Bank of Australia released minutes of its April meeting at which it reaffirmed the policy package introduced in March, specifically:
-a target for the cash rate of 0.25 per cent
-a target of 0.25 per cent for the yield on 3-year Australian government bonds
-a term funding facility to support credit to businesses, particularly small and medium-sized businesses
-an interest rate of 10 basis points on Exchange Settlement balances held by financial institutions at the Bank.
Furthermore, the bank revealed that it is going to maintain the policy extremely loose until the economy recovers:
The Board confirmed that the target for three-year yields would be maintained until progress was made towards the Bank’s goals of full employment and the inflation target, and that it would be appropriate to remove the yield target before the cash rate itself was raised. The Board would not increase the cash rate target until progress is made towards full employment and it is confident that inflation will be sustainably within the 2â3 per cent target band.
Considering the decision, policymakers acknowledged that the majority of macroeconomic data available at the time of the meeting was for February, before the coronavirus outbreak, making it hard to estimate the impact of the outbreak on the economy. Still, the forecast for economic growth was pessimistic, predicting that “GDP could fall significantly in the June quarter and remain subdued in the September quarter”.
RBA Governor Philip Lowe echoed the grim forecast in his speech today, predicting that the economy will contract by about 10% in the first half of this year and the unemployment rate will climb to 10% compared with the 5.2% level registered in March. The Governor also warned about counting on a quick economic recovery:
Whatever the timing of the recovery, when it does come, we should not be expecting that we will return quickly to business as usual. Rather, the twin health and economic emergencies that we are experiencing now will cast a shadow over our economy for some time to come.
AUD/USD fell from 0.6335 to 0.6299 as of 9:10 GMT today. EUR/AUD edged up from 1.7139 to 1.7206. AUD/JPY dropped from 68.19 to 67.61. At the same time, AUD/NZD jumped from 1.0490 to 1.0530.
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