AUD/USD: Dovish comments from RBA not sufficient to alter gradual strength going forward – MUFG

AUD/USD has dropped significantly, falling back to the 0.7100 level down from last week’s high of 0.7243, after Phillip Lowe, Governor of the Reserve Bank of Australia (RBA), said he could cut rates to 0.1% and leave rates at lower levels for longer, as per MUFG Bank. The RBA's dovish stance outweighed a better-than-expected jobs report from Australia, where the Unemployment Rate remained below 7%.

See – AUD/USD to drop below the 0.7050 level – Westpac

Key quotes

“RBA Governor Lowe signalled that the RBA is seriously considering purchasing longer-dated bonds. More specifically he stated that ‘we’re taking our time to work through that issue… But that’s what we’re discussing at every one of our meetings’. RBA Governor also expressed some concern that Australian 10-year government bond yields are higher than ‘almost anywhere in the world’, and they are trying to understand whether that’s because, after buying longer-dated securities in March it had cine stopped.”

“The comments have further encouraged speculation that the RBA could announce more easing at their next meeting on 3rd November including a new QE programme buying up to AUD100 billion of 5-year to 10-year government bonds. It could help to dampen upward pressure on the Australian dollar which has benefitted from the relatively small expansion in the RBA’s balance sheet so far. 

“The need for further RBA stimulus has been strengthened by their increased desire to support the labour market. The latest labour market report released overnight revealed renewed deterioration with the employment falling by 29.5k in September following an increase of 129.1k in August. The unemployment nudged higher as well by 0.1 point to 6.9%.”

“Overall, the negative developments have put a dampener on the aussie in the near-term but are not sufficient to alter our outlook for more gradual strength going forward.”