The RBA are growing frustrated with the lofty level of the Australian dollar.
Attempts to jawbone the currency lower – that is, to use verbal intervention to express dissatisfaction at its level – have been used on countless occasions in recent years.
Everything from “uncomfortably high”, “above most estimates of its fundamental value” and even threats of market intervention have all come and gone to limited, short-term success. Beyond that, however, the currency still remains far higher than where the RBA would like it.
At their May monetary policy meeting, the RBA opted for a slight tweak to their verbal intervention, suggesting that “further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices”.
The language was far more forceful than what was seen in April where it noted “further depreciation seems likely, particularly given the significant declines in key commodity prices”.
While the markets ignored this increased jawboning attempt wholeheartedly – the removal of an explicit easing bias in the policy statement sent the Australian dollar sharply higher – based on the evidence presented below, it’s clear they may have a point.
The chart, dating back to September 2011 when the RBA’s commodity price index peaked in Australian dollar terms, shows just how far that Australia’s key commodity exports prices have fallen compared to the level of the Australian dollar.
In AUD-terms, commodity prices have sunk 35.3%, near double the decline registered against the US dollar and some four-times greater than the decrease in the RBA’s own trade-weighted index.
While commodity prices should not be the sole determining factor used to evaluate a currencies valuation, clearly on this basis a lower Aussie appears justified.
In the absence of a sharp recovery in the prices for Australia’s key commodity exports, a near-term rate hike from the US Federal Reserve, rather than increased verbal intervention, still remains the most likely catalyst to grant the RBA its wish.