HSBC: AUD Implications: FXWW

From the FXWW Chatroom: The most interesting part of today’s statement was how little effect the recent rise in the AUD appears to be having on the RBA’s outlook. With the AUD having rallied by 4 cents against the USD since the last board meeting, the central bank could easily have shifted to more aggressively jawboning the currency if they were worried.
Instead, the post-meeting statement reported that the forecasts were largely unchanged and that growth was still expected to pick up to around 3%. Although they noted that ‘an appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast’, at its current level, the AUD has not materially affected their forecasts. They also dropped the reference, published in the July statement, to an appreciating currency ‘complicating’ the adjustment at the end of the mining boom.
Another key challenge the RBA faces is that the housing market remains uncomfortably exuberant. The RBA’s reference today to there being ‘some signs that [conditions in the housing market] are starting to ease’, runs somewhat counter to the RP Data monthly numbers which today reported price growth of 11% and 14% y-o-y in Sydney and Melbourne, respectively. In our view, this challenge may be best dealt with by the RBA beginning to lift its cash rate.

Our central case is that growth will pick up to an above-trend pace in H2 2017, underlying inflation will lift to be back in the 2-3% target band and the RBA will deem, in early 2018, that it then has little reason for its very accommodative cash rate setting. If the AUD can rise as much as it did over the past month and not impact the RBA’s forecasts, it may be that the AUD is not as much of an impediment to this view as it previously might have been. In short, the AUD may not need to be as low as it has been once the rebalancing act is done.

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