By Vishnu Varathan, Head, Economics & Strategy, Asia & Oceania Treasury Department, Mizuho Bank, Ltd.,
The Time-State Divide
The RBA, with its dovish flourishes, was a setback for AUD bulls; with AUD forced to abandon 0.78 aspirations, as prices slipped from the firmer side of mid-0.77 to low-0.77 post-RBA.
To be clear, it was not as if the RBA’s dovish stance was unexpected. In fact, dovish bias was in line with expectations as RBA’s explicit “insurance” bias has been that more than offsets the solid economic/jobs recovery has been widely acknowledged. Rather, it was the RBA’s dovish bias expressed via time-dependent forward guidance, in contrast to the Fed’s shift to state-dependent dovish guidance, that undermined AUD.
Notably, the RBA’s view that conditions (notably tied to inflation durably recovering to 2-3%) for a rate hike are “unlikely to be until 2024 at the earliest” suggests a duration guarantee on policy accommodation via the cash rate; in turn helping to anchor AUD.
To be fair, like the Fed, the RBA’s QE may be state-dependent; with an extension of outright bond buying possibly set for a slowdown (depending on Covid) when policy is reviewed in July.
But because the RBA’s QE is in;
i) pre-determined quantum (two tranches of A$100bn so far);
ii) over a stipulated duration (over 6 months each); state-dependence is not as evident as the Fed’s open-ended QE. What’s more, unlike the Fed, the RBA is running YCC concurrently.
The wider point here may be that the initial differentiation between central banks, which maintain “dovish insurance” during this interim period of nascent and fragile recovery, may be along the lines of state-dependent or time-dependent forward guidance.
And so, even with a solid Q1 GDP read expected for Australia (more below), AUD boost may fall short of unbridled gains as RBA’s dovish assurances subdue.
And in any case, July’s policy shifts on QE and YCC will probably be assessed before sustained levels shifts come through.
Meanwhile, firmer UST yields and fumbling equities amid dampened risk appetite have frustrated unfettered USD sell-off.
- EUR has faltered at mid-1.22;
- USD/JPY dips appear hampered, and;
- USD/SGD attempts to go sub-1.32 are struggling.
These interruptions are not inconsistent with bearish USD trend being state- rather than time-dependent!
Australia Q1 GDP: Solidifying Recovery
Q1 GDP is set for a third consecutive quarter of expansion, boosted by resilient consumer demand as underscored by monthly retail sales; which despite moderating from 4.5% QoQ expansion in Q4 to 1.9% pick-up in Q1, consistent with a solidifying recovery.
And while arguably less evident as a direct backstop for growth, fiscal support – led by job market support such as the JobKeeper Program through Q1 2021 – remains an integral part of Australia’s steady recovery; by helping to keep consumer and credit multipliers intact.
Moreover, commodity tailwinds are also expected to have reinforced Q1 recovery. Not just from the terms of trade impact, with its attendant pick-up in activity, but crucially via the investment channels as evidenced by (nominal) private sector capex surging over 6% QoQ up from 4.2% in Q4.
This, encouragingly, suggests a broadening recovery. And these drivers of recovery are likely to underpin growth momentum momentum into Q2; especially as Covid resurgence appears to have impacted Australia to a far lesser degree, notwithstanding the recent outbreak in Melbourne, compared to gimmer realities in ASEAN.
So, in contrast to growing risks of interrupted recovery in ASEAN – and the attendant downward revisions to 2021 growth – risks of a major setback for Australia are subdued.
Nonetheless, beyond the solidifying recovery near-term, impending withdrawal of exceptional fiscal stimulus that has probably flattered the consumer confidence, will be the reason for the RBA to err on the side of caution; keeping stimulus in place as insurance.