You can understand why RBA governor Glenn Stevens is frustrated when it comes to the Australian dollar. Despite his best efforts to convince markets that it needs to fall, it simply refuses to do so.
Take today for an example. Stevens delivered a speech in Brisbane that left the door open to further interest rates cuts and declared for the umpteenth time that the currency, in his opinion, needed to move lower.
In response, the Australian dollar did exactly that – it fell by 0.5%.
However, revealing the dominance of larger central banks in determining the overall level of the Aussie, as quickly as the decline occurred, it has now completely reversed, and then some, in response to remarks from Bank of Japan governor Haruhiko Kuroda that the Japanese yen is currently very weak.
The 5-minute tick chart below shows the price action in the AUDUSD, shown in purple, against the USDJPY this afternoon.
Struggling to see the significance of that remark on the Australian dollar? Here’s why.
Kuroda’s remark saw the yen gain over 1% against the US dollar. In response to that move the US dollar index, something that is largely determined by movements in the yen in Asia, weakened significantly as consequence. As a result of that move, instead of being down against the US dollar as was the case earlier in the session, the Aussie now finds itself up close to 0.5%.
Struggling to keep up. It’s crazy, I know, but that’s the reason Aussie is higher this afternoon.
While this is only a short term move that can be reversed equally as quick, it demonstrates that policy decisions made by larger central banks are far more influential on determining the level of the Aussie dollar than the RBA itself.
It also shows that until the US Federal Reserve actually begins to increase interest rates, something that looks increasingly likely later this year, the near-term downside in the Aussie remains limited at best.