Australian Dollar Talking Points
AUD/USD takes out the September low (0.7006) ahead of the Reserve Bank of Australia (RBA) interest rate decision on November 3, but the future implications of the US Presidential Election may influence the exchange rate following the interest rate decision as Congress struggles to pass another round of fiscal stimulus.
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Fundamental Forecast for Australian Dollar: Neutral
AUD/USD slipped to a fresh monthly low (0.7002) as the US Dollar advanced on the back waning investor confidence, and the RBA meeting may produce headwinds for the Australian Dollar as the central bank is expected to implement lower interest rates.
The ASX 30 Day Interbank Cash Rate Futures reflect a greater than 80% probability for a rate cut even though Governor Philip Lowe insists that “the recent Budget provided welcome further support to the economy,” and the central bank may continue to utilize its non-standard tools as “members discussed the options of reducing the targets for the cash rate and the 3-year yield towards zero, without going negative, and buying government bonds further along the yield curve.”
It remains to be seen if the RBA will deploy more non-standard measures ahead of 2021 after tweaking the Term Funding Facility (TFF) in September,but more of the same from the RBA may generate a limited reaction as officials “consider how additional monetary easing could support jobs as the economy opens up further.”
At the same time, the Federal Reserve may follow a similar approach at its interest rate decision on November 5 as the central bank vows to “increase our holdings of Treasury securities and agency mortgage-backed securities at least at the current pace,” and the outcome of the US Presidential Election may largely influence the near-term outlook for AUD/USD as the Greenback continues to exhibit an inverse relationship with investor confidence.
As a result, current market trends may remain in place as the lack of urgency to pass another round of fiscal stimulus puts pressure on the Federal Open Market Committee (FOMC) to provide additional assistance, and the threat of a protracted recovery may push Chairman Jerome Powell and Co. to further stretch the limits of monetary policy as the Fed’s balance sheet climbs to a fresh record high in October.
With that said, the outcome of the US Presidential Election may influence investor confidence amid the future implications for monetary policy, and swings in risk appetite may continue to sway AUD/USD as Vice Chair Richard Claridawarns that “additional support from monetary—and likely fiscal—policy will be needed.”
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— Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong