FX Perspective
The most notable change in the wording of the RBA statement as it kept the cash rate at 2% as expected was on the Australian dollar. Governor Stevens’ view used in May-July that further AUD “depreciation seems both likely and necessary” seemed likely to be retained for another month. Instead it was removed and replaced with a statement that AUD “is adjusting to the significant declines in key commodity prices.” The new wording does not imply any dissatisfaction with AUD’s current value. Such a view would fit Westpac’s view that AUD/USD is quite close to fair value, indeed probably a touch below.
There were probably plenty of AUD shorts to be covered on the surprise statement, with last week’s CFTC data showing speculative net short AUD positions the largest since Aug 2013 (83k contracts combined leveraged funds and asset managers). Momentum could take AUD/USD to around 0.7400 short term, perhaps even 0.7490/0.7510 if we see a NY close above 0.7356. But to sustain gains multi-day/week, we would need to see fresh positives from commodities and yield differentials. After all, Governor Stevens has always played down the importance of jawboning on AUD and today’s statement does not rule out further monetary easing. Overall, the RBA has helped AUD/USD solidify its position in a rough 0.7250-0.7450 range but probably no more than that.
The most notable change in the wording of the RBA statement as it kept the cash rate at 2% as expected was on the Australian dollar. Governor Stevens’ view used in May-July that further AUD “depreciation seems both likely and necessary” seemed likely to be retained for another month. Instead it was removed and replaced with a statement that AUD “is adjusting to the significant declines in key commodity prices.” The new wording does not imply any dissatisfaction with AUD’s current value. Such a view would fit Westpac’s view that AUD/USD is quite close to fair value, indeed probably a touch below.
There were probably plenty of AUD shorts to be covered on the surprise statement, with last week’s CFTC data showing speculative net short AUD positions the largest since Aug 2013 (83k contracts combined leveraged funds and asset managers). Momentum could take AUD/USD to around 0.7400 short term, perhaps even 0.7490/0.7510 if we see a NY close above 0.7356. But to sustain gains multi-day/week, we would need to see fresh positives from commodities and yield differentials. After all, Governor Stevens has always played down the importance of jawboning on AUD and today’s statement does not rule out further monetary easing. Overall, the RBA has helped AUD/USD solidify its position in a rough 0.7250-0.7450 range but probably no more than that.
Bond Market Perspective
The RBA’s lack of concern over the medium term inflation outlook, combined with its comment on the AUD, will provide further support to the consensus that RBA policy is on hold for the foreseeable future. As such it is entirely logical that the curve flattened in response to the announcement, with the 3yr bonds trading heavily. We expect that curve to flatten further in coming days, supported by an expected revision to the RBA’s expected growth forecast in Fridays Statement on Monetary Policy. That revision will underwrite a tactical “buy dips” mentality over coming weeks, especially at the longer end of the curve.
The RBA’s lack of concern over the medium term inflation outlook, combined with its comment on the AUD, will provide further support to the consensus that RBA policy is on hold for the foreseeable future. As such it is entirely logical that the curve flattened in response to the announcement, with the 3yr bonds trading heavily. We expect that curve to flatten further in coming days, supported by an expected revision to the RBA’s expected growth forecast in Fridays Statement on Monetary Policy. That revision will underwrite a tactical “buy dips” mentality over coming weeks, especially at the longer end of the curve.
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