The Australian dollar has been on a tear over the past few weeks, rallying 6% against the US dollar.
A combination of a weaker greenback, firmer commodity prices and increased speculation that the RBA may be on the cusp of hiking interest rates has proven to be a potent mix, leaving the Australian dollar as the best performing G10 currency so far in 2017.
According to Westpac’s currency strategy team, the Aussie’s recent ascent has also left it looking a tad overvalued based on its own internal modelling, noting that it currently sits at the top of its fair value range.
Here’s the chart:
The AUD/USD has been on some kind of run, right? Sitting at the highest level since May last year. It’s also at the loftiest level since December 2014 on a trade weighted basis.
To Westpac, those levels should be making the RBA feel uncomfortable, and increases the risk that it may attempt to jawbone the Aussie lower to ensure it doesn’t “complicate” Australia’s economic transition away from the mining infrastructure boom.
This second chart underlines the point that the RBA may attempt to talk down the Aussie dollar, starting today with a key speech from Guy Debelle, RBA deputy governor, in Adelaide.
From Westpac, it shows the evolution in the RBA’s language towards towards the Australian dollar since the start of 2015.
Since the beginning of the year, the RBA has been warning that “an appreciating exchange rate would complicate” Australia’s economic transition. Since the bank’s July monetary policy meeting, the Aussie has clearly appreciated, taking it back to levels where the RBA has, in the past at least, expressed displeasure at its strength.
While that doesn’t automatically imply that the RBA will roll out the jawbone, it is clearly a risk.
Martina Song, strategist at Westpac, says that upcoming speeches from the RBA could be “opportunities for officials to talk the AUD lower or dampen rate hike expectations”.
Along with Debelle’s speech today, RBA governor Philip Lowe will also speak next Wednesday, providing two opportunities to correct market pricing, should the RBA see it necessary to do so.
While no one but the RBA knows whether that will happen, Westpac says given the balance of risks, it’s still more likely that the AUD/USD will finish the year at 75 cents rather than 85 cents as some commentators have been speculating upon.
“The AUD/USD is destined for lower levels later in the year,” it says. “We would require a further significant appreciation in commodity prices for us to be happy that an aggressive push into the mid 80s is possible.”