MACQUARIE: The RBA can’t rely on the Fed to push the Australian dollar lower

Photo by William West – Pool/Gertty Images

No matter what’s thrown at the Australian dollar at present, it just doesn’t want to go lower. In the early parts of the year where investors were falling over each other to sell it, now any excuse is being sought to buy it: Janet Yellen is speaking – buy Aussie. Crude is bouncing – buy Aussie. Stocks are higher – buy Aussie. The list could go on.

While many factors have contributed to the change in sentiment towards the Aussie, the main one behind its recent resurgence is the scaling back of expectations for US rate hikes in the year ahead. Almost instantaneously, the dollar sell off accelerated, underpinning gains in commodities, stocks and currencies, and as a consequence of its relationship to all three, the Australian dollar.

Optimistic commentary from the RBA towards the domestic economy, trimming expectations for further rate hikes in the year ahead, along with signs of life from China’s economy, also helped to fuel the rally.

After logging its largest monthly gain against the US dollar in nearly five years during March, and gains in the trade-weighted index not far behind, the RBA is clearly becoming uncomfortable, warning earlier this week that a prolonged period of Australian dollar strength “could complicate the adjustment under way in the economy”.

The bank could have gone harder towards its recent ascent, but it’s a subtle form of jawboning nonetheless.

To Jason Todd, Morana Hunter and and Pelen Ji, analysts at Macquarie Securities, the RBA will have to do far more than talk the currency down if they want to see a meaningful decline, suggesting the RBA cannot rely upon the US Federal Reserve to do the job for them.

“The AUD is going to need more than jawboning to get it substantially below US$0.70 in a world driven increasingly by negative rates and narrowing policy divergence,” say Macquarie. “We worry the market know what the RBA’s game is.

Instead of waiting for the US interest rates to rise to lower the Aussie, Macquarie suggests the RBA will need to “work against the Fed”.

“It is increasingly likely that the RBA will have to work against the Fed, who as custodian of the global currency, is balancing a broader responsibility in global financial market stability,” say Macquarie.

“We need a larger or faster move by the RBA to sustainably weaken the AUD… a bazooka sized policy response would be good for some shock and awe to make being short the AUD a strong risk reward trade from US$0.76, to set the economy on a substantially higher trajectory.”

Macquarie, already calling for two additional 25 basis point cuts to the cash rate this year, suggest the RBA may have to go even further should the US Federal Reserve not raise rates in the months ahead.

“Our economic team think policy moves elsewhere may mean the cash rate is required to go below their current 1.50% forecast,” they say, adding “the risk of the RBA getting the Fed call wrong might be worth it.”

Australian cash rate futures have one full 25 basis point rate cut priced in by the end of 2016. The vast majority of economists believe the next move in interest rates will be higher, although not until well into next year.