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.”