Key insights from the week that was.
The release of the RBA’s August Board meeting minutes this week continued an extensive run of commentary from the RBA which also included Governor Lowe’s testimony to Parliament at the end of last week. Unsurprisingly, in light of the uncertainty related to the Victorian lockdown and global risks, the RBA Board does “not rule out adjusting the current package if circumstances warranted”. At the very least, it is reasonable to expect the cash rate to remain at 0.25% for three years, as the 3-year bond yield target of 0.25% points towards.
A lower currency could aid our export competitiveness and thus support the recovery. But, on the RBA’s view, intervening in the currency would only have a chance at being effective if the currency was out of step with fundamentals. This is not the case currently, with the Australian dollar viewed as “broadly in line with fundamental determinants, such as commodity prices and interest rate differentials”.
Indeed, to our mind, fundamentals support continued Australian dollar appreciation.
The end of last week saw another strong outcome for Chinese fixed asset investment. At June, real estate investment in 2020 was around 2% higher than the first six months of 2019. And at July, investment by state-owned and associated entities was even stronger, up 4% on the same period in 2019. Private business investment is still below its comparable level of 2019, but well off its lows and strengthening rapidly (year-to-date growth is now at -6%yr from -26%yr at February). Chinese household consumption is also improving robustly after being halted by restrictions around lunar new year and further impacted by a consequent loss of income. With industry back at work and real estate construction strengthening rapidly, the outlook for consumer spending is strong.
This promising momentum in China is behind our view that commodity prices and demand will remain supportive of the Australian dollar through 2020-2022. Further, assuming the world continues to move towards an effective vaccine and consequent broad-based recovery, risk appetite should also build over the period, providing additional support. As a result, today we have revised up our Australian dollar view. We now expect USD0.75 cents at end-2020 (previously USD0.72) and USD0.80 by end-2021 (previously USD0.76), a level that is likely to be sustained in 2022.
While recent RBA communications and timely data such as the Westpac Card Tracker continue to emphasise the downside skew of risks for Australia’s economy, virus and economic risks on the other side of the world are much greater. This is particularly the case in the US where political uncertainty related to November’s US Presidential election also has to be contended with.
Finally, coming back to New Zealand, amid uncertainty over the extent of the virus’ resurgence in Auckland, yesterday our New Zealand economics team released their latest quarterly update. New Zealand’s experience since March highlights that an economy can bounce back strongly from lockdown as long as restrictions remove the threat, thereby allowing the economy to operate freely after. Extensive fiscal support from the Government is also key to recovery. To assess the potential consequences of the current outbreak, two scenarios are provided. The baseline assumes that the current outbreak is relatively brief; the alternative view that Level 4 restrictions are required to suppress and eliminate COVID-19. The outlook for the RBNZ and government debt is also discussed, among other key themes.
