AUD: Doing What You’d Expect? – Rabobank
Jane Foley, Research Analyst at Rabobank, suggests that the RBA Governor
Stevens gave the value of AUD/USD a prod lower overnight by referring
to inflation as “really a bit too low” and describing the exchange rate
as a “shock absorber” that is “doing what you would expect it to do at
the moment”.
Key Quotes
“The release of weaker than expected Australian Q1 CPI inflation data at
-0.2% q/q, 1.3% y/y preceded the RBA’s surprise 25 bp May 3 rate cut by
just a few days. The release of the Q2 CPI data is scheduled for July
27 and another soft number is likely to underpin speculation for another
rate cut in August. We retain a dovish outlook for the RBA, but
precisely how many more rate cuts are in the pipeline will depend on a
range of events stemming from concerns about Chinese demand for iron ore
and coal, the labour market, the domestic housing market and the
outlook of the AUD.
Despite the sharp decline in the value of AUD/USD between early 2013 and
September 2015, the Aussie remains overvalued against a number of G10
currencies.
While the RBA’s view on the exchange rate has been relatively opaque
over the past 6 or so months, we would warn against reading this as
proof that the committee is less worried about its strong currency.
While this year’s recovery in oil prices will reduce the drag on
Australia CPI index going forward, this base effect is unlikely to kick
in until the latter part of 2016. Even with this boost to prices, RBA
policy makers expect that “inflation in Australia was likely to remain
low over the next year or two”. This outlook is based on the low level
of wage inflation and domestic cost pressures “combined with the
appreciation of the exchange rate and the low level of inflation
globally”.
Last week, the release of the April labour market report showed a fall
in the Australian unemployment rate to 5.7% and a net gain in employment
of 10.8K. However, these headlines were overpowered by the fact that
full-time jobs dropped by 9.3K and the news that growth in the Q1 wage
price index slowed to 2.1% y/y. We see the low level of wage inflation
as a constraint on domestic demand going forward and, given our fears
that growth in China could slow, we expect the RBA to keep pushing the
AUD lower with policy signals. We look for a test of AUD/USD0.70 by Q4.”
