RBA March Meeting: Preview & FX Implications - BofA Merrill

We do not expect any material change in tack from the RBA at its meeting this week. In our view, the closing sentences of the Bank’s February press release say it all, asserting that “Over the period ahead, new information should allow the Board to judge whether the recent improvement in labor market conditions is continuing and whether the recent financial turbulence portends weaker global and domestic demand. Continued low inflation may provide scope for easier policy, should that be appropriate to lend support to demand.” Monetary policy can be eased further as inflation is not a barrier to that. The question is whether the outlook appears as if it will deteriorate enough for the further easing of policy to be necessary. At this stage we do not think it will.

There has been little shift in the data to alter the Bank’s thinking on the economy in terms of activity or real GDP growth. And there has been no change to the RBA’s view that activity should pick up from here, it asserting that “there were reasonable prospects for continued growth in the economy”. Nonetheless, labor market data have been softer in recent months. Yet we think this should come as little surprise given the extraordinary growth experienced in the back-half of 2015. We do not anticipate the RBA will judge global financial market volatility has worsened since the Board last met. And although lower equity prices may negatively impact confidence, lower oil prices and the rebound in iron ore prices will likely be viewed positively.

Watching the FX language Implications for FX Market:

The Reserve Bank of Australia's Board Member John Edwards recently said he would be more comfortable with AUDUSD trading around 0.65 rather than current levels, albeit adding that he wasn't confident that a move to that level would occur. This was the first time in a while that we heard an RBA official "talk down" the exchange rate. It will be important to watch the RBA's policy statements, as well as comments from the Governor Glenn Stevens, to judge whether the median opinion of the Board also believes stronger rhetoric on the exchange rate is warranted. Previously the RBA stated: "The exchange rate has continued its adjustment to the evolving economic outlook." While there is some risk this language will be modified, we do not expect the RBA to strongly talk down the AUD - especially given the recovery in iron ore prices and decline in interest rates of its major trading partners, both of which are inputs into its assessment of FX valuation.

BofAML targets AUD/USD at .69, .67, .66, and .65 by the end of Q1, Q2, Q3, and Q4 respectively. 

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