RBA Signals a Drawn Out Reduction to Pandemic Stimulus

AUD

The AUD dropped the ball against the majors yesterday following cautious tone from the RBA and risk-averse sentiment in US Equities. The RBA has decided to keep the benchmark interest rate at 0.1%, proving the market consensus right. The RBA held true to their word as QE purchases are now running at A$4bn/week from this month onwards compared to the earlier rate of $5.0bn/week. However in what has been labelled a "dovish taper", the Bank signalled that they will continue the reduced level of bond purchases at $4.0bn/week until at least mid-February 2022, an extension from their earlier indication of November 2021. The extension and ‘open-ended’ timeline putting a question mark in currency markets which likely weakened the AUD after the initial gains. US Equities started the week after the long weekend on a sour note as most were trading lower, with the Dow Jones down -0.7%, the S&P 500 -0.4% while the NASDAQ was flat. Commodity markets couldn’t excite markets with Gold and Iron Ore trading marginally below flat. Little in the way of data domestically today with eyes on improving vaccination rates showing some light at the end of the tunnel for everyone stuck at home.

USD

The AUDUSD was weaker losing the 0.74 mark overnight as it currently trades at 0.7388 this morning. The American Dollar was able to advance against most of the majors as negative risk sentiment meant that the aforementioned US Equity indexes were closing in the red. In the absence of high-impact macroeconomic data releases, the sharp increase witnessed in the 10-year US Treasury bond yield seems to be helping the greenback find demand. Adding to the sour mood are reports of House Republicans facing increased pressure to vote against a bipartisan infrastructure package when they return to Washington later this month. This prospect challenges the timeline of the much-awaited US stimulus, further strengthening the US Dollar due to its safe-haven appeal. It’s been an otherwise slow start to the week for the US but with the JOLTS Job Openings being posted at midnight tonight, we could see some further activity in currency markets.

EUR

The AUDEUR is also trading weaker overnight, suffering the heavy treatment after the RBA announcement, trading at 0.6237 at time of writing. European Equities were also trading in the red with the FTSE, DAX, and CAC trading -0.5%, -0.6%, and -0.3% respectively. On a negative note, the ZEW Survey of Economic Sentiment for the Eurozone declined to 31.1 in September from 42.7 in August and fell short of analysts' estimate of 35.3. Rising eurozone inflation will provide the backdrop for the ECB's meeting tomorrow night, with markets hoping for hints of when policymakers might start easing their massive pandemic-era stimulus. Speculations that Chairwoman Lagarde could talk down any chatter around tapering the ECB’s asset-purchase programme remain high despite some Governing Council members already advocating for reduction on the stimulus package in past days.

GBP

The AUDGBP also trading lower into the morning, currently sitting at 0.5357 at time of writing. Bank of England's Saunders said in a speech yesterday “We no longer need as much stimulus as before,” and that he worries that continuing asset purchases when CPI is 4% might cause medium-term inflation expectations to drift higher. The Pound has enjoyed the hawkish sentiment from members of the BoE in recent weeks, with it being noted that the first challenges will be surrounding the timing and pricing of any increases to interest rates. Some forecasters predict 15bp of tightening priced for 2022 and another 25bp by end 2023, taking the Bank Rate to 0.50% in mid-2023.

NZD

The AUDNZD not managing to escape the battle as it also trades lower at 1.0407 this morning. The latest Covid-19 figures from New Zealand have been easing and helped NZ PM Jacinda Ardern to pull the nation off alert level 3, excluding Auckland, to alert level 2. As the rest of the country wakes up to a level of normality, Auckland continues to see pockets of Covid popping up in the community, with additional locations of interest still being released. Four new locations of interest have been released by the Ministry of Health this morning. Moving on, a lack of major data/events may restrict the market moves with the currency pair likely taking direction from Europe and the ECB later this week.