The Australian dollar has overshot iron ore weakness and that might force a change at the RBA

Photo by Donald Miralle/Getty Images

The Australian dollar has been doing relatively well against the US dollar recently. That’s despite Fed-induced US dollar strength, acute weakness around forex markets and the continued weakness in industrial commodities, particularly iron ore.

That’s a problem for the economy and the RBA according to Annette Beacher, TD Securities chief Asia-Pac macro strategist.

In a note to clients this afternoon Beacher highlighted the divergence between iron ore and the Aussie and thinks it could trigger a response from the RBA, potentially as soon as tomorrow, in the monthly statement on interest rates.

Here’s what she said:

If the “correlation” between the AUD and the iron price held, the exchange rate would be closer to the cyclical low of $US0.69 rather than $US0.718. The RBA at its last Board meeting of 2015 could use this relationship to get ahead of the Fed hike (Dec 17) and jawbone the currency lower via re-introducing the phrase “given the decline in key commodity prices, further depreciation is likely”. It may not emerge in the statement tomorrow, but could be reintroduced in the February 2016 statement should this divergence continue.

Something to watch for.

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