Market Analysis

Aussie Airborne?

Wednesday will see a sizeable strike expire in AUDUSD at 1500h London time. ThomsonReuters IFR (TRIFR) wrote on Tuesday of an AUD 859 million expiry at 0.8000 which traders may wish to bear in mind. It remains to be seen whether or not that level proves magnetic. That aside, going forward how might the currency market interpret Tuesday’s monetary policy statement from the Reserve Bank of Australia (RBA)? In the first instance of course the level of AUDUSD by definition expresses the market’s relative evaluation of both the Australian and the US Dollar. The RBA doesn’t have any sway over how the market perceives the US dollar and, as has recently been the case with broad greenback weakness, couldn’t easily arrest Aussie strength versus the US currency even if it wanted to. But the RBA can seek to influence market perceptions on the Aussie and Tuesday’s change of tone by the Australian central bank vis-a-vis the AUD’s value was surely an attempt to do that. France’s Credit Agricole CIB made the point on Tuesday that “after more than a year of the same rhetoric where the RBA said that an appreciating [AUD] would “complicate” the rebalancing of the economy… the [RBA] Board has changed its rhetoric to say the higher exchange rate will “contribute to subdued price pressures” and weigh on the outlook for “output and employment”.”

The French firm concludes that “in reality, the higher currency could lead to the RBA further delaying raising rates, but is highly unlikely to lead to rate cuts as the latter would further inflate a residential property bubble. So, the RBA’s rhetoric without the threat of rate cuts will have only a modest impact on the currency” and that “the RBA would have to threaten or perform FX intervention to have a bigger impact.” The RBA has shown no signs, as yet, of being poised to intervene and, logically, if AUD strength remains partially a function of US dollar weakness and/or better China data (given AUD is often a proxy trade on the Chinese economy given Australia’s strong commodity exports to China), intervention might not be overly effective. Central banks that intervene to sell their own currency want to turn market sentiment not just give speculators better levels to buy it. Indeed US firm Morgan Stanley feels that “by suggesting that its growth outlook has remained unchanged, [the RBA] implicitly suggested that, in light of stronger global growth and the recent surge in Australia’s terms of trade, the Board might be willing to tolerate further currency strength.” Perhaps the market will need to see Wednesday’s 0.8000 expiry roll off before it makes a firmer judgement but, and traders will have their own views on this, Morgan Stanley thinks AUDUSD could “advance further to 0.84 over the next few weeks.” That would give the RBA something to ponder.

Written by Neal Kimberley, External Currency Analyst.