Markets: RBA's currency concern

Investors will be closely watching the Reserve Bank’s comments on the Aussie dollar, which remains high by historical measures.

The gain in the Aussie dollar is likely to be short lived, with the Reserve Bank meeting tomorrow. Previous rate cuts and commentary reflect RBA Governor Glenn Stevens’ concern over the strong exchange rate and its impact on economic gorwth.

Emma Lawson, a senior currency strategist at National Australia Bank, explains with a US congressional vote on any military action against Syria delayed until next Monday, it has been a broader risk positive event for currencies trading against the US dollar. The Australian dollar has gained 0.79 per cent against the US dollar on the day.

China’s better-than-expected July Purchasing Manager’s Index has given a little bit of support, but Syria is the dominant force.

Despite the Aussie dollar having depreciated around 15 per cent against the US dollar since April highs, Stevens commented after the last rate cut that it still remains at a high level. It is evident the RBA wants a lower trade weighted exchange rate, but officials have provided no indication as to how low they actually want the currency to go.

Without explicitly referencing an exchange rate level, Stevens notes the possibility of the dollar depreciating further, which would help rebalance growth in the economy. With GDP numbers due out on Tuesday, we will get a better idea of how domestic growth is tracking. Obviously the result will influence monetary policy over the coming months and how the Aussie dollar is perceived by global investors.

Stevens’ words on Tuesday will be central to providing the Aussie dollar with either support or reviving weakness. It is widely accepted the Aussie has further to fall, with market pundits set to closely examine the RBA announcement.

While concerns about Syria have eased for now, other factors will influence local currency movements.

Lawson explains some of the major headwinds facing our dollar comes from the expectations of the Federal  Reserve tapering. With long-term yields globally on the rise, the Aussie dollar no longer looks attractive as a carry trade, consequently there has been a resurgence of investors preferring the US dollar once again.

Beyond this, Lawson includes the drama unfolding across emerging markets and the fact the Aussie dollar is a liquid proxy, offering little upside for the currency from here.

Any comments on Tuesday from the RBA alluding to the Australian dollar having to fall further will put additional pressure on the currency.    

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