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Summary
- AUD/USD pair showed slight improvement on Thursday, afters a slight dip of 1.16% observed on Tuesday following the monetary policy announcement.
- RBA Governor Phillip Lowe commented that interest rates would not be increased till 2024, at the very least.
- Investor sentiment in the US stock market continued to fluctuate as many investors continue to recover from the short squeeze.
AUD/USD improved slightly on Thursday after a dip in the currency exchange rate observed on Tuesday. The highly traded pair has seen persistent declines in the US dollar over the past couple of months. Additionally, following the GME and AMC short squeeze, confidence in the US Dollar remains low.
The RBA’s monetary policy was also announced this week, following which the AUD softened against the USD. In addition to this, the RBA governor Phillip Lowe addressed the nation on Wednesday about the coming year. He highlighted that Australians had remained resilient throughout the crisis and that the losses faced by the country had been much lesser than anticipated.
The Monetary Policy Decision
On Tuesday, the RBA announced that it would keep interest rates unchanged and would provide higher quantitative easing. The RBA would purchase additional A$100 billion worth of bonds issued by the Australian Government. These additional purchases would be done at the current rate of A$5 billion per week.
Governor Lowe commented that despite the heavy cost of the pandemic, the economic downfall was not as low as had been expected and recovery had started earlier than expected. GDP and various other indicators had outperformed earlier predictions.
The RBA also highlighted that inflation remains low and below target. For the current year, CPI is expected to be 1.25% and for 1.5% for the next year. Consumer prices have increased in the previous months; However, RBA does not plan on increasing the interest rates until the inflation rate target of 2-3% is achieved.
The unemployment forecast for the month of December was expected to reach an all time high of 10%. However, the actual unemployment rate during the month landed at 6.6%, much better than the anticipated 10% peak.
Image source © Bakhtiarzein Megapixl.com
The factors that worked for Australia were - successfully containing the virus, fiscal policy support and the country’s quick adaptability to the changing scenarios. These factors are credited for increased positive outlook observed in the previous days.
ALSO READ: Why RBA kept interest rate unchanged
The Earlier Decline
The extension of the quantitative easing program by the RBA came as a surprise to many. The program is expected to end in April now. The RBA believed that the surprise element was crucial to make the policy effective.
A higher cash rate would mean greater FDIs and greater demand for the Australian Dollar. This could improve the value of AUD. The current interest rate of 0.1% offers little to no advantage for foreign investors to pour in their money into the country.
However, the RBA stated clearly that the interest rates are not expected to increase till 2024, at least. This could mean lesser investments from foreign investors. Thus, AUD showed a downward movement immediately after the RBA announcement.
However, AUD/USD saw a 0.5% uptick just minutes before the RBA monetary policy decision was released. The pair has seen a varying trajectory since then as the rate first decreased, then recovered 0.13% on Thursday following Governor Lowe’s speech about the prospects for Australia.
