When Interest Rates Don’t Matter
Context is key when it comes to interest rates. What is happening globally to other central banks is always an important consideration to keep in mind.

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We have a great question from Kerrick, asking about the AUD, saying that he can see from our fundamental strength meter that we are bullish on the AUD on a fundamental bases and wants to know why we are seeing the AUD so bullish when the market doesn’t expect the RBA to raise rates for the next three years?

So, I think this is a fantastic question, especially in the current environment that we are finding ourselves after the pandemic, but it’s also a good example for other times as well.

If we take a look at the interest rate probability tracker inside the terminal, we can see that interest rates are either just below or just above 0.0% for all the major central banks, and the reason of that was of course the synchronised easing measures that was put in place by central banks around the world by cutting rates as well as introducing QE programs and other easing measures. So, if you look at the RBA in isolation the fact that they are close to 0.0% and the fact that they are years away from hiking looks like a negative, but when every other major central bank is also close to the zero bound and are also expected to keep rates lower for a long-long time, then that isn’t really that much of big deal anymore, and means that in these types of environments interest rates don’t matter like they usually would.

Remember, that in fundamental analysis, it’s never just one thing like Monetary policy, but rather it’s always a combination of factors that we need to consider in order to establish whether one currency should be stronger or weaker than another or whether one currency should appreciate or depreciate against another. Of course, in usually market environments monetary policy is usually the biggest factor to consider for a currency in terms of interest rate expectations, but in a context like we are dealing with right now it’s not what matters the most right now.

So, as a quick example of this with the Aussie Dollar right now. While we’re on Monetary policy let’s start there, arguably right now the RBA isn’t anywhere near hawkish, but after their last meeting they put in a few additional easing measures by cutting rates down to 0.1%, by lowering their yield curve target and by adopting a more traditional QE program as well, and after that was done, seeing that Australia’s economy has not been hit as bad compared to some of the other major economies, it means that it will take something really devastating to cause the bank to do even more, which means that right now the market deems monetary policy to be appropriate and as long as the economy starts to show signs of recovery in 2021 will probably have been the last easing from the bank in this current cycle.

In terms of economic performance, yes, the economy has done much better compared to the rest of the developed economies, but we know that economic data hasn’t really been that important over the past couple of months for markets, not after the crazy numbers we’ve seen for things like GDP, but nonetheless, the Australian economy did well to curb the virus compared to the rest of the world and their economy has taken a much less severe knock than originally thought, so that’s arguably bullish for the AUD.

Then we look at fiscal policy. The government and the RBA have done quite a lot to support jobs in the economy, and according to some analysts the implementation of the job protection policies and programs has been one of the key driving factors of the recovery seen in the labour market as an example, but arguably when it comes to fiscal policy it’s not something alone that makes the AUD more bullish than another major economy right now so that one, I’ll say is neutral for the AUD.

Then on the Intermarket analysis there is a lot going for the AUD right now. On the one hand the AUD is a pro-cyclical currency, which means that it tends to do really well whenever the global economy goes through early recovery stages, which of course is what the market expects to happen going into 2021.

Apart from that the expectations for a broad-based depreciation for the US Dollar to move into a more secular downward trend has been very positive for commodities, add to that inflation expectations that has been flying higher which is another positive input for commodities, all of that is very positive for the commodity-dependent Aussie Dollar.

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