The surprising dovish bias from the Reserve Bank of Australia is weighing on the Aussie as market participants are finally
expecting that further monetary policy easing is on its way. Despite the recent change in stance, we still anticipate the RBA to cut its Cash
rate to 0.50% at its first 2020 MPC on 4 February 2020 after a series of three cuts in 2019, even if the outcome of the US – China trade conflict
still plays a major role on the latter. Further easing along with government fiscal policy is likely, while the last bulwark of the RBA could
be the implementation of unconventional policies (i.e. QE). Therefore, the outlook for the commodity currency has strongly turned as
Beijing turns pessimistic on the prospect of an interim trade deal with the US.
The downward trend seen in the labor market after solid numbers in September adds up to political pressures that Australian
authorities are facing to adopt additional stimulus, as it is likely to conclude with a larger budget for FY 2020-2021 due in early May 2020.
October unemployment rate and employment printed at 5.30% (prior: 5.20) and -19K (prior: 12.5K; consensus: 15K), signaling a drop in new
job openings, a decline not seen since September 2016 while 3Q wage growth slowdown to 2.20% (prior: 2.30%) supports the case. The minutes of
the 5 November 2019 meeting confirm that the RBA is expected to maintain a wait-and-see approach as it is expected to make a “full assessment”
of the impact of current easing conditions and its negative effect on savers and confidence. The RBA concludes that the latest rate
decisions had a positive effect on employment and wage growth, although it seems that the housing market benefits most from the measures
while it also expects low interest rates to stay for an “extended period” in the country. Following the release, implied probabilities have
risen 59.50% for a rate decrease in February 2020 compared to 37.30% following November meeting.
By Vincent Mivelaz
