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What Is New For the Australian Dollar?

October 7, 2020 By Mircea Vasiu

The Australian dollar keeps hovering above the 0.7 level against its American peer and trades with little or no direction. The highest it has been during the coronavirus crisis was just shy above 0.7400, on the back of the Fed’s efforts to improve the USD lack of liquidity in the international financial system. 

Monetary policy is the sum of central banks’ (and sometimes governments too) actions that influence the money supply and credit in an economy. In doing so, central banks try to influence households and corporations to save or consume. As such, when the central bank perceives that the economy is overheating, it will try to stimulate saving. When the opposite happens with the economy, central banks stimulate consumption.

The Reserve Bank of Australia (RBA) sets the monetary policy every first Tuesday of the month. This past Tuesday, the bank re-evaluated the monetary stance and reinforced its willingness to do more to stimulate economic recovery.

RBA Cash Rate Decision – Non-Event for Financial Markets

Financial markets move in tight ranges due to the U.S. elections less than a month from now. As a result of that, any market reaction to some other economic news will likely be quickly retraced or ignored until the elections are behind us.

Last Tuesday, the RBA decided to keep the cash rate unchanged. It did the same with the Term Funding Facility (i.e., Australian QE) and the yield on the 3-year Australian Government bonds.

The bank noticed that while the June economic contraction of 7% was influencing the economic performance, the drop was less severe than in other parts of the world. Also, the fiscal stimulus delivered is likely to continue, as well as the favorable financing conditions provided by the RBA.

The biggest challenge and problem for the RBA is unemployment. The bank stands ready to do what it can to protect jobs, and as such, it is willing to maintain a highly accommodative policy setting.

Patience is one of the attributes a trader needs the most. Without patience, the trader stands at risk of overtrading just because the markets are open.

When looking at central bank decisions and trading based on the outcome, it means that fundamental analysis is at the core of the trading decision. But fundamental analysis needs time.

As such, anyone wanting to trade the Australian dollar, regardless of the direction, should not watch what the RBA does or not. Instead, it should watch what the stock market in the United States does, as it moves depending on what the U.S. elections suggest.