AUD Post-RBA: A Turning Point? - Views From 10 Major Banks

The biggest surprise in today's RBA policy statement was the removal of “further depreciation seems both likely and necessary”. As this has triggered short-term boost for AUD, market participants started to wonder if this might constitute a turning point for the currency. The following are the views on what does this mean for AUD, along some trading ideas to play it as provided by the strategists at 10 major banks.

BofA Merrill: This is the first statement since Mar 2014 when Stevens hasn't explicitly mentioned the currency was too high - that's a BIG deal. With positioning short AUDUSD, decent data earlier today and key levels for stops coming up - would recommend a tactical long AUD position here and looking for much better levels to get back into medium term shorts.

SocGen: There’s nothing to prevent the references to the currency from returning in future meetings but for now, the RBA is no longer talking the currency lower. Again, with Fed/RBA policy set to diverge further in the months ahead, and with the AUD still vulnerable to adverse shocks from the Chinese economy or from global commodity markets, I wouldn’t rush out to declare the 4-year downtrend in AUD/USD over, but it’s not the most attractive short looking forwards. Since AUD/USD peaked in July 2011, as well as falling by a third against the dollar, AUD has fallen by 12% against NZD for example, and AUD/NZD has a lot of upside as a result now that relative rates are moving in AUD’s favour. It’s fallen by 13% over that period against the Euro, and 30% against sterling, too. Both those stand out as long term opportunities to buy AUD, while FX positions as hedges against more bad news in China are better achieved through NZD/USD shorts now.

BNPP: The RBA did not deliver the dovish message that many were anticipating this morning. While the easing bias is retained, it does seem that the hurdle for further rate cuts has increased somewhat in recent weeks with some signs of improvement in the domestic economy and ongoing rebalancing of the currency. The RBA has also toned down it rhetoric aimed at weakening the AUD – probably as it has fallen significantly vs the USD. That said, given the risk from China and ongoing falls in commodities, AUD is likely to remain under pressure from here...Short AUD positioning is not yet stretched (- 18 on our -50 to +50 scale). We expect AUDUSD to break 0.70 this year and remain bearish on the AUDNZD cross.

Nomura: The RBA kept rate unchanged at today’s policy meeting. However, the biggest change was on the currency with the removal that “further depreciation seems both likely and necessary”. This change suggests that the RBA is getting more comfortable with the current level of AUD and believes that the currency is no longer significantly overvalued. We estimate that the AUD is still slightly overvalued against USD (fair value is slightly below 0.72) and is overvalued by about 10% on a TWI basis. We believe that the RBA’s change of view can be explained by the following quote from a recent speech by Gov Stevens: a somewhat lower exchange rate was likely to be a part of the necessary adjustment. That adjustment seems to be occurring, with relatively little disruption, and is having an expansionary effect. Growth in services trade for example is picking up. This quote suggests that the level of AUD is no longer viewed as hampering the rebalancing of growth and the AUD is sufficiently weak to spur foreign demand. We continued to expect further weakness in AUD in the medium-term, but the speed and size of the move is likely to be smaller than previously.

ANZ: The RBA’s post meeting statement changed its language in reference to the AUD, but that doesn't mark a turning point for the currency. We remain more focused on the Bank’s language regarding the amount of spare capacity in the economy, and this still suggests there is no near term shift in tone on the horizon. While this slight tonal shift may support the AUD marginally against other commodity currencies, concerns surrounding the outlook for iron ore, the path of the USD, and evidence of waning risk appetite in other markets will be more important drivers of the AUD’s direction. This means that the statement, together with the better data pulse of late, should ensure that the AUD outperforms against commodity crosses. However, the risks to a long AUD position against traditional funding currencies like the USD or the JPY are still tilted to the downside.

Credit Agricole: In line with market expectations the central bank left interest rates unchanged. In addition inflation is regarded to be consistent with target and employment growth somewhat stronger than anticipated. From that angle it appears likely that investors’ RBA rate expectations continue to stabilize. Most importantly, it was no longer stressed that a further fall in the AUD is likely and necessary. As a result to the above outlined conditions the currency was among the strongest currencies. Given further room of stabilizing rate expectations and as global risk sentiment remains broadly stable regardless of well supported Fed rate expectations, it cannot be excluded that the AUD is facing further upside risk in the short-term. This is especially true as better than expected retail sales should also add to stabilizing inflation expectations. From a broader angle, however, intact uncertainty as related to China and muted commodity price developments should keep the upside limited.

Westpac: The most notable change in the wording of the RBA statement as it kept the cash rate at 2% as expected was on the Australian dollar. The most notable change in the wording of the RBA statement as it kept the cash rate at 2% as expected was on the Australian dollar . Momentum could take AUD/USD to around 0.7400 short term, perhaps even 0.7490/0.7510 if we see a NY close above 0.7356. But to sustain gains multi-day/week, we would need to see fresh positives from commodities and yield differentials.

BTMU: The most notable change to the RBA’s policy statement was that they removed the phrase that “further depreciation (of the Australian dollar) seems both likely and necessary, particularly given declines in key commodity prices”. The RBA has softened verbal intervention intended to weaken the Australian dollar, and has implied that the Australian dollar is now more appropriately valued although it is still “adjusting to the significant declines in key commodity prices”. Renewed weakness in commodity prices highlight that the downward adjustment for the Australian dollar may not yet be complete, and is increasing the likelihood of further RBA easing.

Commerzbank: Many investors are likely to have expected more outspoken comments regarding the exchange rate. In fact the RBA merely pointed out that AUD was adjusting to significant falls in commodity prices. The RBA’s wait and see approach is appropriate in view of the positive economic developments, even though it still depends on the weak AUD. There is not much scope for a stronger AUD. Unless commodity prices rise notably the RBA is likely to remain cautious – hoping for a weaker AUD.

SEB: The bullish spring bottom, a clear divergence of lately between the AUD and iron ore prices and today’s decision from RBA to leave rates unchanged are all factors underpinning the upside correction we’ve been warning for. A primary target will be for the pair to recheck the recent break of the 2001 trend line and a secondary target will be the 0.75 area from where the latest round of selling were unleashed.

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