AUD/USD ticks lower as RBA pushes interest rates to a record low

AUD/USD ticks lower as RBA pushes interest rates to a record low
Written by:
Crispus Nyaga
November 3, 2020
  • The Australian dollar ticked lower after the latest RBA interest rate decision.
  • The bank lowered interest rates and announced a slew of other interventions.
  • The governor also pledged to do more in case the economy remains under pressure.

The Australian dollar (AUD/USD) is down by 0.30% as traders react to the latest interest rate decision by the Reserve Bank of Australia (RBA). It is trading at 0.7040, which is slightly below the intraday high of 0.7062.

AUD/USD
AUD/USD drops after RBA rate cut

Australia slashes interest rates

The Australian economy went through its first recession in more than 30 years this year because of the pandemic. The economy shrank by 0.3% and 7% in the first and second quarters, respectively. Like in other countries, it bounced back in the third quarter. However, it is facing significant challenges as travel restrictions have affected its service industry.

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It is against this backdrop that the Reserve Bank of Australia (RBA) held its monetary policy meeting. In a statement today, the bank said that it was lowering its rate by 0.15% to 0.10%, the lowest it has ever been on record. This rate cut was in line with what analysts polled by Reuters were expecting. It was also the fourth rate cut this year.

In addition to cutting rates, the bank implemented more measures to stimulate the economy. It reduced the target of the 3-year Australian government bond to 0.1% from the previous 0.3%. This simply means that the bank will buy as much government bonds to ensure that the rate remains at this target.

The bank also intervened in its Term Funding Facility by lowering its interest to 0.1%. Most importantly, the RBA decided to reduce its interest rates on Exchange Settlement balances to zero.

On quantitative easing, the bank will purchase A$100 billion of government bonds with maturities between 5 to 10 years. These purchases will happen in the next 6 months. If needed, the bank will buy more bonds to cushion the economy. In a statement, Philip Lowe said:

“The Bank remains prepared to purchase bonds in whatever quantity is required to achieve the 3-year yield target. Any bonds purchased to support this target would be in addition to the $100 billion bond purchase program.”

The bank justified these extraordinary measures by pointing at the overall economic outlook. It expects the unemployment rate to peak at 8% and drop to 6% by 2022. This will lead to lower inflation, which it sees to be around 1% in 2021 and 1.5% in 2022.

The RBA is not the only major bank to meet this week. The Fed and the Bank of England (BOE) will start their meetings tomorrow and deliver their decisions on Thursday. This is after the Bank of Canada and the European Central Bank (ECB) met last week.

AUD/USD technical outlook

AUD/USD
AUD/USD technical chart

On the four-hour chart, we see that the AUD/USD pair has been in a downward trend recently. The pair has moved from the September high of 0.7412 to today’s low of 0.7040. It has formed an equidistance channel that is shown in green. Also, it is slightly below the 15-day and 25-day moving averages. The awesome oscillator is also below the neutral level. Therefore, I expect the pair will continue falling as bears aim for the next support at 0.6962.