Why Australian Dollar's Fall Won't Last Long

A resilient housing market and evolving monetary policies elsewhere in the world could mean the Reserve Bank of Australia soon signals a hawkish shift.

The Australian Dollar’s decline, seen mostly throughout August, could be short lived if Bank of America Merrill Lynch strategists are right and the Reserve Bank of Australia soon begins to hint at a possible upward move in the cash rate.

The Aussie dollar has given ground to many of its G10 rivals in August, thanks to a sideways movement in iron ore prices, geopolitical tensions stemming from sabre rattling by North Korea and evolving monetary policy narratives elsewhere in the world.

“The RBA is set to keep policy on hold when the board meets next week.... However, the policy discussion should get more interesting now that the forecast round is out of the way and the next Parliamentary testimony is six months away,” says Tony Morriss, a rates and economics strategist at Bank of America Merrill Lynch.

The recent performance comes on the heels of strong gains earlier in the year, driven largely by a recovery in key commodity prices, which were themselves aided by a steady economic performance from China.

The Pound to Australian Dollar exchange rate (GBP/AUD) fell around 60 points to 1.6313 during the final session of August, due mostly to a weakening Sterling and not a broader recovery of the Dollar.

The Australian Dollar / US Dollar exchange rate was down by 0.27% to 0.7884 while the Australian dollar to euro exchange rate was broadly flat at 0.6654.

Several key sets of economic numbers have so far proven unable to dislodge the antipodean currency from its current downward path, including the private sector capital expenditures report released Thursday and the construction spending report released Wednesday.

“FX valuation is unlikely to be a concern yet suggesting the AUD should remain supported in the absence of a slowdown in China,” Morriss says.

Morriss’ and his team are not perturbed by the year to date gain for the Aussie dollar or by its fall throughout August, as the RBA’s models probably suggest the current Aussie dollar levels are close to fair value.

"A bit lower" is always welcome, but the RBA is unlikely to revert to the more active verbal intervention it engaged in a few years ago. Against this backdrop, the AUD should remain supported (in trade weighted terms) in the absence of a slowdown in China,” the strategist wrote in a note Thursday.

The BofA team have forecast that the Reserve Bank will become more hawkish if the housing market remains steady and central banks elsewhere in the world, for instance the Federal Reserve and the ECB, begin to adjust their own policies.

“We expect a stronger signal that the next move in rates is up, but timing will depend in part on other central banks moving first,” Morriss and the strategy team say.

The Reserve Bank of Australia will announce its latest interest rate decision on Monday, 05 September, and the Australian second-quarter GDP number will be released on Wednesday, 06.

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