RBA: Exchange rate rise may feature in statement - AmpGFX

The RBA may be debating whether it should sound more concerned on the level of the exchange rate, notes Greg Gibbs, Analyst at Amplifying Global FX Capital. 

Key Quotes

“For some time it has said, “The depreciation of the exchange rate since 2013 has assisted the economy in its transition following the mining investment boom. An appreciating exchange rate would complicate this adjustment.”

“Since the beginning of this year, the RBA has said “would complicate”; throughout 2016 it said “could complicate”

“In the Q&A after his speech last week on 25 July, Lowe said, “it would be better if the exchange rate were a bit lower than it currently is.”

“Compared to 2013, the exchange rate is still a lot lower, and the RBA is still likely to say that this has assisted the economy in transition.”

“However, it is also the case that, following its surge in the last month, the exchange rate is at a high since December-2014 in trade-weighted terms.  It is not all that much higher than in was in Feb/March this year, but the AUD/USD is more significantly higher than it was at this time and psychologically this has an impact as well.”

“Some of its rise reflects a weaker USD.  Commodity prices have also firmed in the last month.  As such, the RBA may not want to sound too alarmed.  Nevertheless, the RBA may choose to alter its statement on the exchange rate in an attempt to dampen its appreciation; especially if the rest of the statement sounds more upbeat.”

“It is likely to at least acknowledge in its statement that the exchange rate has appreciated recently.  It could then follow this by reiterating that an appreciating exchange rate would complicate the adjustment in the economy.  This would signal that the RBA is aware the currency has appreciated and further appreciation might influence their policy outlook more significantly.”

“A somewhat more direct attempt to dampen the currency could be to say that the recent appreciation of the exchange rate complicates the adjustment under way.  This might cause some knee-jerk selling of the AUD, signaling that the RBA is more concerned over the recent appreciation of the AUD, suggesting it may pursue a lower path interest rates if the AUD were to rise further.”