On Monday, in a statement, RBA Governor Philip Lowe tipped the announcement of new measures aimed at supporting the Australian economy and alleviating stress in local markets where “trading liquidity has deteriorated”.
The bank was doing its part to bolster the emphatic messaging delivered by central banks to kick off what everyone knew would be an arduous week.
The statement explicitly tipped the launch of QE. “In response, the Reserve Bank stands ready to purchase Australian government bonds in the secondary market to support the smooth functioning of that market, which is a key pricing benchmark for the Australian financial system”, Lowe went on to say, adding that “the Bank will also be conducting one-month and three-month repo operations in its daily market operations until further notice to provide liquidity to Australian financial markets”.
Since then, the bank has pumped massive amounts of liquidity into the system including on Thursday, when the RBA injected a record A$12.7 billion, upstaging Wednesday’s A$10.7 billion deluge.
At its policy meeting Thursday, the bank effectively fired its last conventional bullet, cutting rates to 0.25%, the effective lower bound. It was the second cut this month.
In the statement, the forward guidance suggests rates will stay pinned for the foreseeable future in light of the exigent circumstances.
“The Board will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2—3% target band”, the RBA said.
And here’s the QE announcement:
A target for the yield on 3-year Australian Government bonds of around 0.25 per cent.
This will be achieved through purchases of Government bonds in the secondary market. Purchases of Government bonds and semi-government securities across the yield curve will be conducted to help achieve this target as well as to address market dislocations. These purchases will commence tomorrow. The Bank will work closely with the Australian Office of Financial Management (AOFM) and state government borrowing authorities to ensure the efficacy of its actions.
This is a bit different from the Fed and the ECB. They’re targeting – so, shades of the BoJ, I suppose.
The bank also announced a term funding facility for the banking system, “with particular support for credit to small and medium-sized businesses”.
“Financial market volatility has been very high. Equity prices have experienced large declines. Government bond yields have declined to historic lows”, the statement says, on the way to noting that “the functioning of major government bond markets has been impaired, which has disrupted other markets given their important role as a financial benchmark”. Funding markets, the RBA laments, “are open to only the highest quality borrowers”.
The bank will continue to conduct repos (one-month and three-month) in its daily market operations, and it looks like they’re adding a six-month tenor, which will be offered “at least weekly, as long as market conditions warrant”.
Australian markets have been roiled by turmoil on virtually all fronts. Equities had their wildest intraday ride ever last Friday, and losses have piled up amid the global risk-off fervor.
Local shares officially hit bear market territory last Wednesday, just 12 days after touching a record high. Since then, losses have deepened. Monday, the benchmark plummeted 9.7%, the largest decline on record.
Meanwhile, the Aussie is sitting at a 17-year nadir, as expectations of recession, policy easing, pressure on commodities and a generalized aversion to anything that’s seen as a global growth proxy, weigh heavily on sentiment.
Wednesday was defined by turmoil in the FX space (see here and here). “The global lockdown trigged self-accelerating appreciation of the USD as investors were forced to reduce leverage across all asset classes”, Axicorp’s Stephen Innes said Thursday. “With few liquid options left to hedge into, the entire gale force of global risk hedging requirements spilled into the Foreign Exchange markets as nowhere else to hide other than the US dollar scenario steamrolled”.
“It follows that when the world is in crisis, fears of USD shortages exaggerate demand”, Rabobank remarked.
On Thursday, traders in Asia cited “a liquidity vacuum” in the Aussie and the kiwi, as everything simply capitulates to the greenback. AUD/NZD traded below parity in the New York session. AUD/CNH is near the lowest on record.
Earlier this month, Australia rolled out a A$17.6 billion fiscal stimulus package in a bid to avert a downturn. The RBA is now committed to doing what it can to help the cause, even as the fight seems all but lost.
As a reminder, Australia hasn’t had a recession in nearly 30 years.
QE details
Starting Friday 20 March 2020, the Reserve Bank is prepared to purchase Australian Government securities (AGS) and securities issued by the state and territory central borrowing authorities (semis) in the secondary market consistent with the objectives as set out in the Governor’s Statement of 19 March 2020.
The Bank will undertake multi-price auctions for government securities. The size and composition of purchases will be determined subject to market conditions and will vary across auctions.
Announcements
The Reserve Bank will announce its intentions for government securities purchases at 11.15 am (AEST/AEDT) on the day of purchase via Yieldbroker DEBTS. The announcement will indicate the total face value (AUD) and specific securities the Reserve Bank is willing to purchase, the time within which offers are to be submitted (from 3.25 pm to 3.30 pm AEST/AEDT) and the settlement date (T+2).
A less detailed notification of the operation will also be provided via the market data services (Reuters — RBA27; Bloomberg — RBAO8) at the same time.
Eligible Counterparties
All RITS members deemed eligible to participate in the Reserve Bank’s domestic market operations may participate in the AGS auctions (see Eligible Counterparties).
Offers
Offers are to be made over Yieldbroker DEBTS.
Offers are to be made in absolute yields in quarter basis point increments, with a minimum offer of $5 million face value and increments of $1 million.
Participants who encounter difficulties in submitting their offers over that system should directly contact Yieldbroker DEBTS and also inform the Reserve Bank’s Domestic Markets Desk by email.
Offers cannot be submitted, changed or withdrawn after the cut-off time for submissions has passed.
Notification
All participants will be notified promptly of the success or otherwise of their offers via Yieldbroker DEBTS.
Aggregated results will be published on market data services (Reuters — RBA28; Bloomberg — RBAO8) shortly after the auction, and in Statistical Table A3 on the Reserve Bank website. These include the issuer and series, face value and weighted average and cut-off yields for each security purchased. No information regarding the identities of the Reserve Bank’s counterparties will be made public.
Securities Lending
The Reserve Bank stands ready to lend securities against AGS and semis (i.e. general collateral) at market rates on a reverse enquiry basis.
Reserve Bank of Australia
19 March 2020
