Stevens is very bearish on the aussie

RBA governor Stevens has once again reiterated his bearish stance on the Australian dollar, leading to another sell-off in the volatile currency. Speaking in New York overnight, the governor stated that the AUD will ‘very likely fall further’. He also noted that Sydney house prices ‘look rather exuberant’ but one city cannot dictate policy for the entire economy; adding that an interest rate cut ‘has to be on the table’.

Stevens’ bearish view on the aussie and his refusal to rule out the possibly of further interest rates cuts, despite the threat of a bubble in Sydney’s property market and recent strong labour market data. Yet, without an uptick in both business and consumer confidence the stimulatory effect of a measly 25 basis cut to the OCR may not be worth the risks. The RBA has acknowledged the diminishing impact that further monetary policy loosening is having on the real economy, but it cannot stand idly by if growth and inflation outlooks are under threat, especially if the Australian dollar strengthens.

The release of the RBA’s minutes (1130AEST) from its policy meeting earlier this month will help determine which way the bank is leaning in regards to another interest rate cut. At the time, the RBA left the official cash rate at 2.25%, stating that the Australian dollar had declined noticeably against the US dollar and a lower exchange rate is likely needed to achieve balanced growth in the economy. Since then the dollar has strengthened a little but not enough to force the board’s hand. In saying that, the bank also noted that further easing may be appropriate in the period ahead.

The release of strong labour market data last week has pushed back the market’s expectations for further rate cuts, with the OIS market dropping its expectations for a 25 basis point cut next month to around 50% after the data, from around 75% prior to the employment figures. More doves have joined the battle since then on the back of Stevens’ speech overnight.

What does this mean for the aussie?

The threat of looser monetary policy is likely to place a cap on AUD gains in the near-term, as we expect the RBA to reaffirm its dovish bias in April’s meeting minutes. At the moment AUDUSD is testing a support zone around 0.7700; a break here could open the door for another mauling towards 0.7550…