FxWirePro: Aussie seems edgy ahead of cash rates, what drives RBA to remain on hold?

RBA is scheduled for its cash rates announcement on Oct 2nd, the consensus for this monetary policy is to maintain status quo.

Well, if the Aussie central bank remains firmly on hold, as we expect, and the US dollar rises on tighter Fed policy, then AUDUSD could fall to 0.76 by year end.

AUDUSD has traded a tight USD 0.6827 – USD 0.81 range since June’2015, leaving range volatility close to recent lows (refer above chart). Upside for the currency has been capped by weaker Chinese activity data in July, and GDP growth for the Q2 still implies an economy growing below trend.

But placing a floor under AUD has been uncertainty around the US inflation narrative, a neutral stance from the RBA (given healthy labour market outcomes in recent months) and better commodity price performance.

Indeed, we have recently revised up our iron ore and coal price forecasts, which should provide some modest support to fair value estimates for the currency (circa +2%, on our estimates).

For the RBA, a stronger currency remains an unwelcome development. The RBA noted in its August Statement that “an appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.”

This commentary was not altered in the September Statement. But with the currency not significantly overvalued on medium term models and having failed to sustain a break above USD0.80, we don't expect the RBA to intensify its rhetoric on the currency anytime soon.

We advocate staying shorts in AUDUSD futures contracts of far-month tenors with a view to arrest downside risks.

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