WESTPAC: The RBA won't try to talk the Australian dollar down next week

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Friday heralds the start of April, meaning the RBA’s latest monetary policy meeting is just around the corner.

While there’s next-to-no chance the RBA will cut interest rates on April 5 — cash rate futures put the odds of a 0.25% reduction in interest rates at just 7% — there’s still plenty of speculation as to whether the bank will talk down the Australian dollar, or “jawbone”, given its recent strength.

To Westpac’s chief economist, Bill Evans, there’s little chance RBA governor Glenn Stevens will up the ante when it comes to placing downside pressure on the Aussie, indicating that he doesn’t expect the governor to make any significant changes in April’s monetary policy statement.

Here’s a snippet from a research note released by Evans on Thursday explaining why.

The most important market development since the last Board meeting on March 1 has been the surge in the Australian dollar. The currency has jumped from USD0.715 to USD 0.765, a 7% appreciation against the USD.

The Reserve Bank puts its emphasis on the Trade Weighted Index (TWI) where the movement has been from 61.3 to 64.2 (an increase of 4.7%).

Supporting the lift in the TWI has been a rise in Australia’s export commodity prices. Westpac’s Index of Commodity Export prices (including Iron Ore and Coal – WCFI) has lifted from 155 to 166 (up 7%) since the Board meeting in March. The spot iron ore price has surprised by increasing to US$54/t, up from $50 at the end of February and bouncing off the December low of $38 – despite plentiful supply and weak demand.

Though Evans suggests the governor will likely discuss jawboning, changing the language towards the currency in the statement from “adjusting to the evolving economic outlook” to something like “a lower AUD seems both likely and necessary”, he believes the RBA will hold off on this occasion.

“Such a change in strategy around the AUD commentary would be very significant,” says Evans.

“But we also need to remember that central banks are inherently conservative institutions. We expect that, like ourselves, the RBA will be sceptical about the recent recovery in commodity prices and, more importantly, like ourselves, still expects the Federal Reserve to raise rates in June.”

In such circumstances, Evans believes a prudent approach is not only appropriate, but likely.

The RBA April monetary policy statement will be released on April 5 at 2.30pm AEST.

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