The RBA needs Yellen's help on the Aussie dollar

Reserve Bank governor Glenn Stevens' jawboning won't drive down the dollar to US85 cents, but a rallying greenback will. But more heavy lifting needs to be done by the Fed.

After a stint on the sidelines, Reserve Bank of Australia Governor Stevens took the opportunity to resume attempts to talk the Aussie dollar down last week. It was a timely return given the recent surge, but is it enough to send it lower?

It was the first time the RBA governor had been so explicit about the value of the Aussie dollar since he talked of 85 US cents as ‘fair value’ at the end of last year, with some analysts saying the currency could be as much as 12 per cent overvalued. Of course, currencies rarely trade at ‘value’, with this very term being quite subjective and of little significance, anyway.

Australian rates on hold – so what’s new?

What I found most interesting about Stevens' comments were not necessarily those blatant references to the currency, which the RBA can’t really control anyway, but his views on the economy and interest rates, which of course have a real bearing on the direction the currency trades.

He downplayed any negative impact from the budget, mentioned positive early signs of growth in non-mining activity, said monetary policy is already "very accommodative" with real cash rates "well below normal levels" and that low interest rates are working. These are hardly words of a governor that is actually considering reducing interest rates nearer to zero like Europe, the UK or the US.

All in all, I don’t think we got as much out of Stevens as the market has made out. He confirmed interest rates will remain on hold for an extended period. We knew this anyway.

Stevens needs Yellen

For the RBA to get its way and have the Aussie dollar trade back towards 85 cents, it really needs the greenback to rally. On that front the RBA has bought itself some time.

Stevens needs Yellen to do the heavy lifting -- or should I say AUD selling -- by providing some timeframe for an adjustment in US interest rates higher post QE tapering. Not likely any time soon.

So this week’s FOMC minutes hold just as much significance as Stevens' comments did last week. While the Fed is expected to maintain the recent rhetoric on tapering of asset purchases and zero rates for longer, the comments surrounding the dynamic between GDP and employment are sure to capture the market's attention.

Was the Fed concerned about the slowdown in real GDP or buoyed by the pickup in the employment market at its last meeting? Mind you, the meeting did take place before last week’s better-than-expected non-farm payroll numbers, but the trend has been in place for a long time now.

Graph for The RBA needs Yellen's help on the Aussie dollar

Overreaction to see Aussie dollar test 92 US cents

I suspect the Fed could sit on the more positive side of the ledger for the first time in months. If it does not appear concerned with a slowdown in GDP and sends a somewhat optimistic message on the economy, then this would weigh on the Aussie dollar pushing it down further, possibly towards 92 cents. This would be an overreaction as a slightly more optimistic Fed would not necessarily lead to sooner than expected rate rises, but perhaps signal confirmation it's happy to end QE as per its plans.

Jim Vrondas is Chief Currency strategist, Asia-Pacific at OzForex, a global provider of online international payment services and a key provider of Forex news. OzForex Group Limited, is a publicly listed entity with shares traded on the Australian Securities Exchange under the code "OFX".