There seems little doubt in many traders minds that one of the big reasons for the RBA’s cut on Tuesday was to drive the Aussie dollar lower.
Westpac’s Global Strategy team highlights this point, noting that the RBA described the Aussie dollar as “above most estimates of its fundamental value, particularly given the significant declines in key commodity prices.”
But, after a swift 150 point fall below 0.7850, the Aussie rallied back above 78 cents where it sits again this morning – looking stronger than it has in weeks.
Westpac says the RBA, “would likely be disappointed that a ‘surprise’ easing turned into an aggressive squeezing!”
Indeed they might.
But, what the squeeze highlights is that even though the Aussie’s fall of around 8% between the December and February meetings, “simply matched” the fall in Westpac’s fair value model, ” largely driven by a 7% drop in Westpac’s export weighted commodity index”, there are other factors at work such as moves in the US dollar.
The RBA might be disappointed that the Aussie isn’t lower but they’ll be very happy that as the worm seems to be turning away from US dollar strength the Aussie is not substantially higher.
Their cut has worked in that sense.