Aus Dollar Exchange Rate: AUD Firms Up Against Pound, Euro and USD as Key RBA Statement Offers Support

The Australian dollar (AUD) reached four-year lows against the USD this week but has since stabilised  thanks to supportive, though still questionable, employment data and the release of a supportive quarterly economic statement from the central bank.

Seasonality factors of late have raised doubts about the accuracy of recent jobs report.

Nevertheless, the Aus dollar looks set to close the week firmer after Australia netted 24,100 jobs in October, topping forecasts of 10,000 and better than September’s revised loss of 23,700.

The RBA’s quarterly Statement on Monetary Policy (SoMP) meanhwile gave us further insight into the RBA's assessment on the current levels of the AUD. Importantly the statement did not deliver any surprises that could have been taken as negative for the currency.

At the time of writing we note that the Aussie complex looks as such:

• The pound to Aus dollar exchange rate (GBP/AUD): 0.34 pct lower at 1.8433.
• The euro to Aus dollar exchange rate (EUR/AUD): 0.20 pct lower at 1.4432.
• The Australian to US dollar exchange rate (AUD/USD): 0.35 pct higher at 0.8590.

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P.S: The above quotes are taken from the global FX spot market. It must be noted that your bank will widen the spread on the above numbers when passing on their retail rate to customers. An independent FX provider will however guarantee to undercut the bank's offer thus delivering you more forex. Please see more on this here.

RBA Keeps Currency Stable

No major surprises were announced by the RBA.

“Underlying inflation forecasts were revised slightly higher from mid-2015 onwards based on the depreciation in the exchange rate,” says Felicity Emmett at ANZ Research.

However, Japan threatens to keep the AUD elevated as the ‘carry trade’ effect continues. This is where investors borrow cheap money, such as the yen, and invest it in areas offering higher interest rate yields - such as Australia. This pushes up the value of the currency.

“The RBA continues to characterise the AUD as remaining above most estimates of fundamental value, but noted that a potential increase in capital flows from Japan could provide support for the exchange rate,” says Emmett.

The gradual downtrend in the Aussie dollar is likely to continue however as the US Federal Reserve looks to raise interest rates ensuring a steady outflow of funds back to the United States continues.

Why Did the Australian Dollar Exchange Rate Struggle at the Start of the Week?

The AUD has taken a rollicking in global FX markets at the time of writing. The driver will certainly be the rally higher in US bond yields in response to some good economic news out of the US.

As US bond yields rise in anticipation of the first interest rate hike at the US Federal Reserve so the yield advantage enjoyed by Australia is deteriorated.

Funds will continue to be repatriated out of Australian and into the US as a result driving down the value of the AUD.

The latest ADP employment data shows US private employers added 230,000 jobs in October, the most since June and exceeding economists' expectations.

Economists surveyed by Reuters had forecast the ADP National Employment Report would show a gain of 220,000 jobs.

"Higher U.S. yields, falling commodity prices and elevated geopolitical uncertainty undermined the appeal of the higher yielding AUD and NZD. The Aussie, shed nearly one and a half percent to hit a new four-year low overnight," says Omer Esiner at Commonwealth Foreign Exchange.

Traders Now Await the RBA Statement on Monetary Policy

The next big event in the Aussie dollar's calendar is the RBA statement on monetary policy, due on Friday.

"We expect the RBA to continue to characterise the outlook as one of below trend growth, with the Bank to keep its guidance consistent with rates staying on hold for some time yet," says Felicity Emmett at ANZ Research.

Anylysts are expecting inflation forecasts are likely to be tweaked given significant moves in oil prices and the AUD, while the growth forecasts are likely to be broadly unchanged.

In terms of the global backdrop, the Bank is likely to be slightly more upbeat about growth in the US given the strength in the recent economic data, but continue to express some concern about the implications of property market and weakness in China.

According to Emmett:

"On the domestic front, we expect the Bank’s discussion to continue to focus on the prospects for the non-mining growth outlook.

"We expect the Bank to highlight the strength in housing, and express cautious optimism about the prospects for consumer spending and non-mining investment. The Bank is likely to acknowledge the depreciation in the AUD, but continue to implicitly look for further declines.

"The RBA is likely to characterise inflation projections as being “consistent with the target over the forecast period” given subdued domestic inflationary pressures stemming from low growth in unit labour costs.

"That said, we do expect some small changes to reflect the recent drop in the currency and oil prices; the RBA’s August forecasts were based on currency forecasts of AUD0.93 and a TWI of 72, and Brent crude oil forecasts of USD106 per barrel.

"On GDP growth, we expect little change to the RBA’s forecasts. While the decline in the exchange rate is a positive for the outlook, commodity prices are substantially lower than they were in August and are likely to offset any positive from the lower AUD.

"Given some downward revisions to growth in last week’s annual national accounts, there is a possibility that the year average 2014 forecast is nudged down from 3% to 2¾ due to base effects.

"We would not read too much into this, however, given it would be a reflection of revisions to history rather than a change to the outlook."