Photo: O'Neill Photographics/Goldman Sachs. Source: RBA on Flickr, reproduced with permission from the RBA press office.

- AUD lifted after RBA appears to dismiss QE as a prospect.

- But lingering threat of more rate cuts tempers AUD gains.

- AU rates still seen lower in 2020, likely to weigh on the AUD.

- But GBP slumps amid Tory poll retreat and opposition gains.

- GBP downside risks are set to grow as election polls tighten.

- GBP/AUD in retreat from November high, tests intraday pivot.

The Australian Dollar rose Tuesday after the Reserve Bank of Australia (RBA) played down the risk of it resorting to quantitative easing (QE) next year, while Sterling retreated in response to pre-election opinion polls that helped force the Pound-to-Aussie rate into a test of its intraday pivot point on the charts.

Australia's Dollar welcomed comments from RBA Governor Philip Lowe Tuesday, who told the Annual Australian Business Economists Dinner in Sydney that quantitative easing is "not on our agenda at this point in time" and that "negative interest rates in Australia are extraordinarily unlikely."

Markets had begun to worry that both might appear on the RBA's agenda at some stage in 2020 because inflation remains below the target, the labour market has begun to deteriorate even after the bank cut interest rates three times this year and the much-vaunted 'phase one deal' to temporarily end the U.S.-China trade war remains elusive.

"Lowe essentially ruled out negative interest rates in Australia and the purchase of private sector assets. According to Lowe, QE becomes an option to be considered at a cash rate of 0.25% (current cash rate: 0.75%), but not before that," says Elias Haddad, a strategist at Commonwealth Bank of Australia (CBA). "Bottom line: AUD/USD has scope to edge a bit higher to near 0.6815‑0.6830 in the short‑term. Beyond today’s speech by Lowe, AUD/USD will remain confined to a 0.6700 and 0.6930 (200‑day moving average) range until we have more clarity on an initial US‑China trade agreement."

Above: AUD/USD rate at 4-hour intervals alongside 2-year AU government bond yield (orange line, left axis).

Minutes of the November RBA meeting revealed last week that policymakers saw a clear case for a fourth 2019 rate cut this month but opted to wait and further observe the impact that earlier reductions in the cash rate, which has fallen from 1.5% to 0.75% this year, have had on the economy. The bank said "only gradual progress having been made" toward its objectives is reason enough to want to cut rates again but refrained from doing that.

Deputy Governor Guy Debelle told the Australian Council of Social Services National Conference Tuesday that wage growth is now above 2% on an annualised basis but that it needs to be higher if the bank is to see inflation rise sustainably into the 2%-to-3% target band. He and the RBA have long said a lower unemployment rate of around 4.5% is a prerequisite for that wage growth, although the jobless figure has risen from 4.9% to 5.3% in recent months.

"RBA Governor Philip Lowe set a high bar for launching quantitative easing (QE) in Australia. But against a backdrop of stubbornly-low inflation and rising unemployment, we suspect that it won’t be long before it is cleared," says Simona Gambarini at Capital Economics. "We have pencilled in two 25bp cuts next year, one in February and one in April. That would bring Australia’s policy rate to 0.25%, which Mr Lowe indicated as the presumed floor for interest rates and the level at which the Bank would start considering QE."

Pricing in the overnight-index-swap-market implied on Monday, a February 04 cash rate of 0.53%, down from 0.57% last week. However, the implied rate for November 03, 2020 was just 0.47%, suggesting investors currently see little prospect of the cash rate reaching the RBA's 0.25% trigger level for a currency-crushing quantitative easing program any time soon, although those numbers will rise and fall in the months ahead - likely taking the Aussie with them.

Above: Pound-to-Australian-Dollar rate at hourly intervals alongside 2-year UK government bond yield (orange line, left axis).

"AUDUSD saw some modest buying interest emerge but was unable to escape the day's broader low-volatility environment...this reinforces 0.6770 as a pretty solid floor...A sustained rise above 0.6805 may draw out additional buying interest," says Mark McCormick, head of FX strategy at TD Securities.

Aussie gains came Tuesday with Sterling in retreat following the latest eleciton opinion polls. Some polls have showed the Conservative Party lead over the opposition Labour Party narrowing this week, with latest coming from Kantar who said support for the Tories has now fallen two points that Labour has added five points to its score. The governing Conservatives are now on 43% and the opposition some 32% at Kantar.

"A surprise Labour win could send UK equities tumbling, despite a softer Brexit," says Jonas Goltermann at Capital Economics. "Labour’s manifesto is one of the most radical by a major party in a developed economy for several decades. While the party remains well behind in the polls, and the betting markets put the chances of an outright Labour majority at just 3%, there is a decent chance of a minority or coalition government led by Labour."

Capital Economics said Friday a Labour election victory would send the Pound to 1.20 against the U.S. Dollar, a level not seen since the early days of Prime Minister Johnson's leadership when fears of a 'no deal' Brexit were at fever pitch. That would put the Pound-to-Aussie rate at 1.77, down from 1.89 Tuesday, if the AUD/USD rate was trading around its recent low of 0.6770 on December 13 when the election result is announced.

Above: Pound-to-Australian-Dollar rate at daily intervals alongside 2-year UK government bond yield (orange line, left axis).

A Conservative majority would likely mean the agreement struck by Boris Johnson in October takes the UK out of the EU but locks it into 'transition period' as the future relationship is negotiated.

Crucially for markets, this would negate the threat of a 'no deal' Brexit. It'd also spare the economy and Pound from years more of indecision and delay, if not worse, under an anti-Brexit opposition Labour Party government.

"Our pivot point stands at 1.8964. Our preference: as long as 1.8964 is support look for 1.9192. Alternative scenario: the downside breakout of 1.8964 would call for 1.8879 and 1.8829," says Remy Gaussens at Trading Central.

The Pound-to-Aussie rate was testing its intraday pivot point of 1.8964 in the morning session Tuesday. Whether it holds will be key to price action through the rest of the session but Gaussens says that on a multi-week basis, the exchange rate should retain an upside bias so long as it holds above 1.8269.

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