TD Securities doesn't think the RBA will attempt to jawbone the Aussie dollar lower today

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TD Securities doesn’t think the Reserve Bank of Australia (RBA) will use its August monetary policy statement to talk the Australian dollar lower.

Here’s the view of Prashant Newnaha, interest rates strategist at TD, on why the bank is unlikely to express concern about its recent strength:

We doubt the RBA will attempt to jawbone the AUD lower in today’s statement, but the bank is likely to emphasize again that a high AUD would complicate the economic transition.

Real forward interest rate differentials have provided little explanatory power for the AUD rally this year. However comparing the AUD with MSCI emerging market equities suggests the AUD is trading closer to fair and the rally in commodity prices supports the AUD advance. As such, it would be disingenuous for the RBA to suggest the AUD is significantly overvalued at the moment. Hence there is a low probability the Bank jawbones the currency lower today.

The question of whether the RBA will attempt to talk down the currency has dominated market discussion in the lead up to today’s rate decision, and, along with the bank’s commentary on the outlook for inflation and economic growth ahead of this Friday’s Statement on Monetary Policy (SoMP) which will contain its updated economic forecasts, will likely drive movements in the Aussie in the immediate aftermath of the statement’s release.

To Newnaha, the statement is unlikely to shift financial markets significantly today, ascribing an 85% probability that the RBA will deliver a neutral policy statement.

“We expect today’s statement could disappoint the hawks, and should prompt little market movement,” he says.

“Friday’s August SoMP is likely to be more important with market interest on whether the AUD rally impacts the CPI outlook. TD forecasts no change in the Bank’s CPI forecasts but for Q2 GDP to be bumped up.”

This nifty flow chart shows what Newnaha expects from today’s statement.

Source: TD Securities

He sees a 10% chance that the RBA could turn hawkish, laying the platform for a potential near-term rate hike, while he thinks that the chances of a dovish statement are negligible, only assigning a 5% probability that such a scenario will arrive.

The RBA will release its August statement at 2.30pm AEST.

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