It’s nearly a week since the Reserve Bank of Australia (RBA) announced its July monetary policy decision, delivering an unquestionably neutral statement that confounded growing market expectations that it would follow other major central banks such as the ECB, Bank of Canada and Bank of England and turn hawkish on the outlook for interest rates.
To the National Australia Bank’s (NAB) FX strategy team, the Australian dollar was probably at the forefront of the RBA’s thinking as it drafted up its July policy statement with the board all too aware that any hawkish commentary would merely lead to another another bout of buying.
“Had the RBA not pointedly refused to join the ‘tightening bias’ party last week, the AUD would likely have ended the week at least a couple of cents higher than it did,” strategists at the bank wrote on Monday.
“Market talk of an impending 80 cent Aussie would have become rife.
“Knowing this, the RBA looks to have been very deliberate in its choice of words following last Tuesday’s Board meeting, ensuring that even Colombo would have struggled to find even the slightest evidence of a shift away from a neutral policy disposition.”
Instead of ramping up the hawkish language on the back of improving labour market data, the RBA delivered a statement that, in the opinions of many analysts, was actually more cautious than June’s, scuppering expectation for a near-term interest hike that would have sent the Aussie hurtling higher.
The NAB says this was a sensible move from the RBA, noting that the Aussie dollar was already overvalued just before the July meeting was held.
This chart from NAB underlines that point, showing that based on its modelling the Aussie is still overvalued even with the modest weakness seen following the release of the July policy statement.
The NAB says its modelling, done in an attempt to mimic the RBA’s own methodology, suggests the Aussie is still overvalued by around 8% in real trade-weighted terms.
Who knows how much more that figure would have been had the RBA turned hawkish. One suspects it would have been quiet a lot.
Given the reaction of the Aussie to the RBA’s neutral July statement, along with expectations for further rate hikes in the US and weaker commodity prices, the NAB says it has only emboldened its view that the Aussie will finish the year substantially lower.
“If AUD/USD can drop a cent on that, it can drop at least 3-4 cents if it looks like the Fed will deliver something close to its current 2017-2018 median ‘dots’,” it says.
“If we layer on the modest weakening in commodity prices we expect and somewhat less buoyant risk sentiment, then we comfortably get down to 70 cents.”
The AUD/USD currently buys .7610.
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