RBA Flags Risk To Outlook, Inflation From Stronger Aussie

It's probably going to take more than some jawboning...

To be sure, the RBA had their work cut out for them headed into Tuesday.

What started with the market’s hawkish interpretation of the July minutes culminated with the Aussie hitting a 2-year high following the Fed’s dovish lean last week.


You’ll recall that in the wake of the short squeeze the ostensibly hawkish minutes catalyzed some two weeks ago, both Deputy Governor Guy Debelle and Governor Philip Lowe did their best to jawbone their currency back lower.

But even a lackluster CPI print and assurances from Lowe that hawkish leans from other global central banks have “no automatic implications for monetary policy in Australia” were enough to put the brakes on, as persistent weakness in USD and a the tailwind from rising commodity prices conspired to push the Aussie relentlessly higher. Here’s an annotated chart:


The message: it’s probably going to take more than a little dovish rhetoric to stop this train.

The Aussie rose against all 16 of its major peers in the lead up to RBA announcement today, buoyed by a strong Caixin PMI print out of China.

“Even if the RBA offers some protest at the level of the currency in today’s post-meeting statement, it is not going to be accompanied by any indication that it might be willing to use monetary policy to try and bring about a weaker Australian dollar,” Ray Attrill, global co-head of foreign-exchange strategy at NAB in Sydney said, adding that “words will not count for much in the current environment of ongoing U.S. dollar weakness.”

Here’s a snapshot of spec positioning:


And with that, the RBA is out and here are the headlines:

  • Reserve Bank of Australia leaves benchmark interest rate unchanged at record low 1.5 percent for 12th month.
  • Higher A$ weighing on outlook for output, employment
  • Headline and core inflation remain below bottom of the RBA’s 2%-3% target range; wage growth is at record low
  • Economy recorded biggest back-to-back gain in full-time employment in almost 30 years in June, helping soak up some of the under-employment in the labor market; jobless rate at 5.6%
  • House prices advanced 1.5% in July with Sydney and Melbourne continuing to grow. The RBA is watching the impact of macro-prudential measures introduced by regulators that are designed to cool lending
  • The Aussie dollar has risen 11% against the U.S. dollar so far this year, eroding the competitiveness of exporters

Clearly, the Aussie made a cameo or three there, and the reaction was a knee-jerk to day-lows, and an immediate snapback:


Now let’s see if mentioning the FX headwind does anything to damp bullish AUD sentiment…

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