Australian dollar steady as RBA leaves rates unchanged at historic lows

Australian dollar steady as RBA leaves rates unchanged at historic lows

  • The Reserve Bank of Australia left interest rates unchanged at a historic low of 0.25%.
  • Philip Lowe, the governor, pledged to do whatever it takes to safeguard Australia's jobs.
  • The central bank has provided more than $90 billion in stimulus to encourage lending to businesses

The Australian dollar rose against the US dollar after the central bank delivered its interest rates decision. The bank left interest rates unchanged at 0.25% and committed to providing more support to the economy as needed. This decision was in line with what economists polled by Bloomberg were expecting. The bank has slashed rates two times this year.

Australian dollar rises after RBA decision

Australian dollar rises

In a statement, Governor Philip Lowe said that while major markets have been volatile, there were signs of stability. He also committed to do whatever it takes to support jobs and incomes in the country. In the statement, he said:

“The comprehensive policy package announced last month will also support the expected recovery. The Board will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent target band.”

Australia hit hard by Coronavirus

Australia, as with all countries, has been hit hard by the current pandemic. The country has confirmed more than 5,000 cases and less than 50 deaths. While recent data show that the curve of the pandemic is flattening, there are worries that the country will struggle to come back in the near term.

Last week, data from Markit showed that activity in the important services sector dropped to 38.5 in March. This was lower than the estimated 39.8 and the lowest number recorded.

Previously, data from the Australia Industry Group (AIG) showed that manufacturing PMI rose to 53.7 in March. While this number was good, the group warned that it was driven by high demand as Australians hoarded foodstuff and household products. Another number from Markit showed that the PMI declined from 50.2 in February to 49.7.

The slowdown in business activity is directly attributed to the country’s measure to reduce the spread of the disease. For example, the country has halted international flights and implemented some sort of lockdown.

It is also indirectly attributed to the country’s close relationship with China. Australia, which is known for its many natural resources, sells two-thirds of its goods to China. Therefore, when China slows as it did in the first quarter, Australia is affected.

The same applies in the services sector, which is the growing segment of the Australian economy. Most foreign buyers of the country’s services are Chinese. For example, one in five international students in Australia is from China. According to the Financial Times, these students bring more than $25 billion to the Australian economy every year.

Australia first recession in three decades

As a result of all this disruption, Australia is expected to go through its first recession in decades. More Australians are expected to file for bankruptcies, and many businesses are expected to shut. The unemployment rate is expected to soar. In the statement today, the central bank expects the economy to shrink by more than 5%.

This has seen the Australian main index decline by more than 22% this year while the Australian dollar has fallen by more than 12% against the dollar. This makes it among the worst-performing currencies in the developed world. The only worse performer has been the Norwegian krona, which has declined by more than 20%.

Australia dollar has lagged other key currencies

Australian dollar lags other peers

Australia government Coronavirus stimulus

As with all governments, the Australian government has reacted in order to cushion the economy from collapsing. The government has unveiled multiple stimulus packages worth more than $213 billion. The first stimulus of $17.6 billion was meant to help companies manage their wage bill and for welfare recipients.

The other stimulus worth $66 billion went to welfare recipients and job seekers while the recent $130 billion was meant for job seekers and companies.

States have announced a stimulus package worth more than $12.8 billion. Meanwhile, the central bank announced a large $90 billion three-year facility that will help banks lend money to customers.

Australia dollar technical outlook

Australia dollar technical

On the four-hour chart, the Australian dollar has been rising against the USD in the past few sessions since bottoming at around 0.5500. The pair is along the 50% Fibonacci Retracement level and slightly above the 50-day and 25-day exponential moving averages. The pair is likely to continue moving upwards and attempt to test the important resistance level of 0.6210.

By Crispus Nyaga
Crispus Nyaga is a finance analyst and trader with more than 7 years industry experience. He's contributed to some of the leading financial brands in the world including Seeking Alpha, MarketWatch, Forbes, and Investing.com. Crispus has an excellent understanding of global macroeconomic and geopolitical issues, is a big fan of golf, and lives in Nairobi with his wife, son, and nephew.

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