Reserve Bank of Australia expected to backflip on tapering as lockdowns hit economic outlook

The economic data that matters

What will the RBA do with its QE program?

After announcing a reduction in its quantitative easing (QE) program last month, which would have seen bond purchases reduced from $5 billion to $4 billion per week, the RBA is all but certain to reverse the decision, in order to maintain liquidity during the expected slow down in the Australian economy. Not only that, but several high profile forecasters, chiefly Westpac’s economics team, have suggested the RBA ought to increase its bond buying to $6 billion per week. Though it’s a matter of debate how impactful such a move will be, it’s likely at the very least RBA will want to be seen to be “doing something” in response to the latest crisis, in order to sure up public and market confidence.

Could the RBA extend its YCC target bond?

Perhaps the nuance of greatest contention at this meeting is whether the RBA will also reverse its decision not to extend its target bond for its yield curve control program. At its July meeting, the central bank opted not to shift the target to the November 2024 bond, from the April 2024 bond, choosing instead to provide itself policy flexibility given the potential of a cash rate increase in that year. With the Australian economy possibly moving towards another recession, and the market erasing expectations of a rate hike at the end of 2022 in recent weeks, the RBA may wish to anchor expectations by targeting a 0.1% for the November 2024 bond.

The fortunes of the AUD/USD probably hinge on what the RBA does with its QE program. The market has probably already priced-in a backflip on the central bank’s tapering program. However, it’s unlikely that the market has discounted an increase in the QE program, at least entirely.

From a technical standpoint, the AUD/USD looks in a very vulnerable position in the short-term. The pair’s post-pandemic uptrend has broken down, largely due to concerns about a top in the global economic cycle and a resurgent US Dollar. The key levels to watch in the short-term are, on the upside, is resistance at 0.7420, where the pair’s 20-day MA also currently sits, while on the downside, 0.7290/0.7300 proved the most recent low and will be a noteworthy level of supprort.

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