A sharp rebound in the AUD recently is increasingly testing the resolve of the RBA in doing nothing on interest rates and hoping to ease monetary conditions through the currency.
Recent comments from Assistant Governor Debelle underlines the Bank’s desire for a lower AUD, as part of the process in helping the economy rebalance away from reliance on the mining sector. However, it is apparent that the RBA recognise the increasing difficulties of achieving such aims, especially after the US$ has weakened post-Fed.
The recent bounce risks seeing the currency reach 10% above its long term fair value (0.69), leaving the currency near over valued extremes. Subdued wages, along with CPI leaves open the possibility of additional action ahead, although forward looking inflation indicators point toward some price pressures starting to be seen. Net AUD longs have extended to levels not seen since Sept ’14, and could be pared back should Governor Stevens heighten discussion of lower rates.
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We see the AUD falling back below 70 cents by mid-year and then staging only a modest recovery thereafter even as commodity prices likely rebound further.
