UBS Economist Scot Haslem has a cracking note this morning on the relationship between the Aussie dollar, commodity prices and the language that the RBA has used to describe its strength over the past year or so since commodity prices started falling.
We now think it’s likely the RBA will commence ‘open mouth operations’, once again making comments around the AUD being uncomfortably high. While we doubt we’ll see the RBA move to re-instate an explicit easing bias anytime soon, this is likely to see the RBA sounding a little more ‘dovish’ in its tone, whether at today’s RBA meeting, or over coming months. We continue to look for the AUD to track lower to USD0.85 by end year.
As the Aussie has rallied, commodities – especially iron ore – have fallen further which means the RBA has to talk the Aussie lower, or should, in the interests of economic growth in the months and year ahead.
The gap between the iron ore price and the AUD is now about as large as the period from mid-2012 to mid-2013 when the RBA referred to the exchange rate as ‘higher than might have been expected’, and significantly wider than the period in Q4 last year when the RBA referred to the AUD as ‘uncomfortably high’.
We’ll know at 2.30pm AEST when the RBA Governor releases his statement accompanying the decision of the Board from this morning’s meeting.