Australian Dollar Falls against the Pound in Wake of RBA's QE Extension

- RBA to delay quantitative easing taper
- AUD underperforms major peers
- Softer global markets weigh

Above: File image of Governor Philip Lowe (left). Photo Source: RBA on Flickr, reproduced with permission from the RBA press office.

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The Australian Dollar fell in the wake of a decision by the reserve bank to extend its quantitative easing programme while a turn lower in global markets provided global headwinds to the currency's recent trend of appreciation.

The Reserve Bank of Australia (RBA) said at its September 07 policy update that it would indeed reduce asset purchases in September as was signalled in August, but the next review of the quantitative easing programme would be pushed out from November into February.

This is a de facto extension of the Bank's quantitative easing programme and will act as a headwind to the Australian Dollar's appreciation prospects.

"AUD is underperforming most major currencies and AUD/USD fell to a low near 0.7404 shortly after the RBA shifted to a longer quantitative easing (QE) time frame," says Elias Haddad, Senior Currency Strategist at Commonwealth Bank of Australia.

The Pound advanced against the Aussie on the developments, with the Pound-to-Australian Dollar exchange rate going at third of a percent higher to 1.8666.

"The Reserve Bank of Australia stuck to its exit strategy from QE on Tuesday, pressing ahead with its decision to reduce bond purchases by A$1 billion a week this month. However, the central bank postponed its next review of the weekly pace from November to February as it foresaw a slower recovery in the economy amid ongoing lockdowns across Australia," says Raffi Boyadjian, Lead Investment Analyst at XM.com.

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The RBA said it would maintain the cash rate target at 0.10% and maintain the target of 0.10% for the April 2024 Australian Government bond.

It committed to purchase government securities at the rate of A$4BN a week under its quantitative easing programme and to continue the purchases at this rate until at least mid February 2022.

In a statement, Governor Philip Lowe said Australian GDP is expected to decline materially in the September quarter and the unemployment rate will move higher over coming months.

"While the outbreak is affecting most parts of the economy, the impact is uneven, with some areas facing very difficult conditions while others are continuing to grow strongly," he said.

The RBA expects the economy to grow again in the December quarter and is expected to be back around its pre-Delta path in the second half of next year.

But Lowe signalled interest rates are unlikely to rise until at least 2024:

"It will not increase the cash rate until actual inflation is sustainably within the 2 to 3 per cent target range. The central scenario for the economy is that this condition will not be met before 2024."

This would put the RBA behind the Bank of England and U.S. Federal Reserve in terms of interest rate hike timings, a development that could assist the Pound and U.S. Dollar against their Aussie counterpart.

"We confirm our forecast for a weakening of the Australian dollar in the near term, due to the temporary negative effects on growth of the evolution of the pandemic and to the nearing of the Fed’s reversal. The AUD should then recover subsequently as the domestic economic recovery consolidates," says Asmara Jamaleh, Economist at Intesa Sanpaolo.

While the RBA was one factor in a weaker Australian Dollar, the currency is also likely struggling under the weight of softer global investor sentiment.

Stock markets are trading in the red Tuesday, with very little by way of a clear narrative to pin the moves on.

The Australian Dollar maintains one of the highest betas in G10 meaning it is sensitive to days when the market is flat.

The broader backdrop is contradictory: on one hand slowing global growth owing to the spread of the Delta variant is cause for concern but on the other generous central bank monetary support offers a positive narrative.

With the Federal Reserve appearing unwilling to rush into a cycle of tightening monetary policy investors will continue to buy dips in the market, which could ultimately provide the Australian Dollar with support going forward.