During its first meeting this 2021, the Reserve Bank of Australia implemented one of the most "dovish" scenarios, that is, expanding the scope of the stimulus program. This scenario remained in the background before the February meeting – in the light of the recent macroeconomic data, experts discussed the likely result of the meeting from a different angle. The focus was on the dilemma: Will the RBA curtail the stimulus program in April or extend its duration? This means that the option of expanding QE was practically not discussed.
This is the main scenario before the previous year ended, when the world was subject to panic moods in connection with the spread of the British, and later – the South African coronavirus strain. But the mood of investors has clearly improved in recent weeks, including regarding the RBA's next steps. Here, the regulator itself doubted the advisability of further easing monetary policy. Based on the minutes of the December meeting, the Central Bank "may be forced to expand the stimulus program if the pace of recovery in labor market indicators and inflation are uncertain and uneven". In my opinion, this served as a starting point in the context of general market expectations. These expectations have acquired a "hawkish" character after the release of great data on the growth of the Australian labor market and inflation indicators.
However, the fact remains that the RBA was not satisfied with the achievements of the national economy and decided to buy an additional $ 100 billion of bonds. These purchases will begin in April, when the current incentive program ends.
In view of this, it is necessary to discuss the regulator's primary complaints about the current situation. First, the Central Bank was concerned about the weak growth rate of wages. Now, we will pay special attention to this indicator. Along with the salaries of the regulator's members, inflation is also concerning. According to preliminary estimates, it will remain below the 2% target for the next few years. It is further concluded that the government will not begin to tighten monetary policy until at least 2024. Previously, the farthest time point in this context was the year 2023.
In general, RBA's rhetoric was cautiously optimistic, despite the actual easing of monetary policy parameters. It is probably due to this that the Australian dollar withstood the blow: paired with the US currency, it declined to the base of the 76th figure, but did not leave its framework.
In my opinion, this reaction was caused by the market's hopefulness. Apparently, the Central Bank's action today in terms of stimulus measures will be the last one. This assumption is consistent with the RBA's forecasts for the current and 2022 years. According to the Central Bank, the level of Australia's GDP will return to the 2019 level by the middle of this year. The dynamics of growing inflation and wages are expected to be positive, but gradual. The unemployment rate in 2021 is expected to be around 6%, while this indicator will return to the "pre-crisis" range of 5% -5.5% next year. The members of the regulator also noted the progress in the process of combating the coronavirus pandemic. As stated in the RBA's accompanying statement, further positive results in this area will increase consumer spending and investment, and subsequently lead to stronger economic growth relative to current forecasts.
To simply put it, the Reserve Bank voiced quite optimistic rhetoric that suggests that today's "dovish" decision will be the last one, following the expansion of QE.
However, Australian dollar's restrained reaction to the "dovish" results of the meeting suggests that it has a margin of safety: as it turned out, the AUD is not getting rid of fundamentally justified cases. In addition, it should be recalled that the AUD/USD pair is under the background pressure of the US currency, which strengthened throughout the market again.
The US dollar index was testing the 91st mark at the end of the US session on Monday, although it did not stay at this peak afterwards. The market is nervous about the new package of assistance to the US economy: Republican senators insist on reducing the volume of the bill from $ 1.9 trillion to $ 600 billion. Thus, political experts believe that a serious fight in the Senate will unfold around this Biden initiative. It is noted that the leaders of the Democratic Party plan to apply the budget "reconciliation" procedure, which can allow the adoption of the law by a simple majority of votes. Currently, the seats in the upper house of Congress are divided equally between Republicans and Democrats. However, Biden's fellow party members have the advantage of the casting vote of Vice President Kamala Harris. Amid this political tension, the US dollar is in situational demand as a defensive tool.
Nevertheless, AUD/USD buyers are on the defensive even despite the dollar's strengthening and RBA's "dovish" decisions. A fairly strong support level is located at the psychologically important level of 0.7600 (which coincides with the lower line of the Bollinger Bands indicator on the daily time frame). If traders keep the price above this target today, then it will be possible to consider long positions in the mid-term with the first target of 0.7710 (midline Bollinger Bands in the same timeframe). The main target is located higher, namely at the level of 0.7800. However, it is too early to talk about such peaks. It is necessary first for the dollar bulls to at least ease their strength, and in turn, the Australian dollar should get an impulse for its own massive growth.
