RELUCTANT RESERVE: The RBA Wants The Currency To Fall Rather Than Cut Further

Reserve BankGetty / Brendon Thorne

The RBA’s statement that accompanies its decision on monetary policy after this morning’s September Board Meeting had a very similar message to that delivered last month and which was borne out in the minutes to the August meeting.

What we have in the RBA and rates at 2.5% is a central bank that is reluctant to take rates any lower without a compelling case or collapse in demand. The bank wants to see the Australian dollar do all the work.

Michael Blythe, Chief Economist at the Commonwealth Bank, sums up the tightrope the RBA is trying to walk very succinctly in a note to clients released just after the RBA announcement:

The RBA is a reluctant rate cutter from here. And it suggests that it is up to the economic data to make the case for a further cut. Where these thoughts intersect is in the currency. We suspect that policy makers would prefer to see any further easing in monetary conditions come via the Aussie dollar. And today’s Statement sounds the familiar refrain about the AUD remaining “high” and it is “possible” the Aussie will fall further which would “help” the rebalancing towards non‑mining growth.

The big question is how does the RBA get the dollar to fall without cutting rates further given it will be reluctant to sell Australian dollars in the outright market.

It’s a question I put to Michael Blythe:

One of the ways is through jawboning and making it clear that you are maintaining the easing bias. While that didn’t come out very strongly in today’s statement we could get something like we saw last month where there is clarification in the minutes when they are released (in two weeks) as we saw last month when the RBA said that its communication strategy “should neither close off the possibility of reducing rates further nor signal an imminent intention to reduce rates further”.

Blythe thinks that outside of cutting rates and a turn in the recently improved global data that the most likely cause of any further Australian Dollar weakness would be a stronger USD once the taper begins.

They (the RBA) may have in mind the taper trade and a rise in the US dollar. So any weakness in the Australian dollar will come from a stronger US dollar and not so much the doing of the RBA.

It’s a difficult task to talk the Aussie down at a time when the external positives are accruing to it and when short term traders are so short Australian Dollars. It’s partly these factors that have contributed to a 60 point (0.6 of 1 cent) spike in the Aussie since the announcement at 2.30pm AEST.

Disclosure: Greg McKenna is an active currency trader and is currently short AUD – very uncomfortably.

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