For several months the Reserve Bank of Australia (RBA) has been warning about the strength of the Australian dollar, noting in its October monetary policy statement that an “appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast”.
That assumption was proven to be correct this week, at least on the inflation front, with headline consumer price inflation (CPI) rising by a smaller-than-expected 0.6% in the September quarter, seeing the annual rate slow from 1.9% to 1.8%.
Helping to explain that weak outcome, even with soaring electricity and gas prices during the quarter, tradable prices — those which are largely determined by global factors — fell by 0.3%, leaving the annual decline at 0.9%.
While not the sole factor, the high-flying Australian dollar was undoubtedly a major reason why tradable inflation fell.
Its strength this year has made the cost of imports cheaper, making it harder to stir the inflationary pressures the RBA has been trying to achieve.
It may have the chance to help reverse that trend today.
Just have a look at the AUD/USD daily chart below.
The Aussie, from a technical perspective, is looking particularly vulnerable, sitting on a key support that’s been in place for a year. Reinforcing the importance of this level, the AUD/USD is also resting upon its 200-day moving average. Again, another important level.
The question now is will the Aussie break or find support at these levels?
Should it break lower, it could result in even further selling pressure, especially at a time when speculative long positioning in the Aussie remains at historically elevate levels.
Rodrigo Catril, FX Strategist at the National Australia Bank (NAB) is watching developments carefully, suggesting a break below 0.7690 could see the AUD fall to 75 cents in fairly quick fashion.
“The AUD is currently trading at just under the 77 cent mark and fair value is seen at just under 78 cents, so the pair is well inside its 2.6 cent fair value range,” says Catril. “Also this means that despite the recent decline, the AUD is not stretched based on fundamentals suggesting there is still downside risk for the currency.”
While little can be done about the other side of the AUD/USD equation — what happens to the greenback — the RBA does have an opportunity, should it desire, to place some downside pressure on the Aussie dollar today.
Guy Debelle, Deputy Governor at the RBA, is scheduled to speak at the Warren Hogan Memorial Lecture at University of Sydney, providing an opportune time to deliver some subtle jawboning to the Aussie, especially after the weak inflation report released earlier this week.
While there’s no guarantee Debelle will attempt to talk the currency lower, there will be few better opportunities than now given the vulnerable position the Aussie is in.
Debelle’s speech is entitled “Uncertainty” and is scheduled to start at 6.50pm AEDT.
A perfect title heading into the event.