AUD: RBA stuck in neutral gear under a low-inflation economy - ING

"A neutral policy tone at the August RBA meeting was met with strong concerns over what the recent AUD rally means for the economy," notes Viraj Patel, Foreign Exchange Strategist at ING.

Key quotes:

"While it was clearly noted that a soft USD had been the root cause, policymakers were keen to stress the downside risks to their inflation and growth outlook as a result of a stronger currency. Moreover, we believe that the RBA's currency concerns may have been amplified by the trade-weighted AUD breaching the 67 level - the highest since January 2015. Short-term rates have subsequently drifted lower as markets questioned the RBA’s appetite for tightening. We suspect this trend may continue - noting that market expectations for a 3Q18 rate hike may get pushed out further."

"Iron ore prices have picked up a head of steam since June, with robust Chinese demand and lower supply providing support. But, at the same time, we note that AUD’s short-term correlation with iron ore has turned insignificant. We suspect the slightly more favourable terms of trade will play more of a supporting role for the AUD - as opposed to an active driving force."

"Geopolitical tensions, seasonality and market positioning present near-term headwinds, while the ‘lowflation’ domestic economy is unlikely to provide much uplift to local rates. A data-driven recovery in US yields and the USD also point to AUD/USD downside risks. We continue to look for a correction towards 0.75 in 3Q17."

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