This chart shows the Aussie dollar is now at levels that concerned the RBA

The Australian dollar has stormed higher over the past couple of months, both against the US dollar and on a trade-weighted basis.

A combination of broad-based US dollar weakness, low financial market volatility, speculation over the outlook for Australian interest rates, higher commodity prices and improving Australian economic data, among others, has proven to be a potent mix.

It’s also provided an unwelcome headache for the Reserve Bank of Australia (RBA), which has constantly warned over the past year that “an appreciating exchange rate would complicate the adjustment underway” in the economy.

Now, with the Aussie screeching higher and looking like it wants to go further, it’s quickly becoming “complicated” for the RBA.

And, if history is any guide, it’s increasing the risk that the RBA may attempt to talk it lower by curtailing mounting rate hike expectations.

Tim Baker, currency strategist at Deutsche Bank, certainly thinks that the risk of “jawboning” has increased, noting in a report released this week that it’s now at a level where the RBA has attempted to talk it down in the past.

Here’s a great chart showing the evolution in commentary from the RBA towards the Australian dollar over the past three years.

Source: Deutsche Bank

On a trade-weighed basis, it now sits around 5% above the average seen over the past 18 months.

While Baker admits that looking solely at the Aussie dollar’s absolute level makes little sense when trying to determine the likelihood of jawboning, he points out that based on interest rate differentials and movements in the iron ore price — Australia’s largest export item by dollar value — the Aussie still looks expensive on a trade-weighted basis.

And that, in his opinion, could see the RBA take action to curtail its recent strength, potentially as soon as today.

“This suggests scope for RBA commentary to change,” he says, adding that “we retain our bearish view on the AUD”.

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