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AUD still “adjusting” - ANZ

FXStreet (Delhi) – Daniel Been, Research Analyst at ANZ, suggests that the RBA meets tomorrow and he sees a risk that it shifts its language on the AUD once again with iron ore prices down 20% since September and the AUD broadly unchanged, it’s not clear that the AUD is still “adjusting to the significant declines in key commodity prices.”

Key Quotes

“The RBA meets tomorrow for the final time in 2015. While the data pulse over the last month leaves us confident that there will be little change in its tone around the domestic economy, or in its overall bias, there is some chance that the RBA shifts its language on the AUD once again. Statements since August have characterised the AUD with “The Australian dollar is adjusting to the significant declines in key commodity prices.”

“This statement shifted in August, where previously the bank had said “The Australian dollar has declined noticeably against a rising US dollar over the past year, though less so against a basket of currencies. Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices.”

“With iron ore prices having fallen close to 20% over the past two months, and the AUD having been relatively stable the current characterisation is no longer looking appropriate.”

“This is not to say that we expect the RBA to go back to saying that the AUD is overvalued, however something closer to “Recent declines in commodity prices make further depreciation in the AUD seem likely” feels more appropriate.”

“The lack of adjustment in the AUD is also borne out in our model of the AUD risk premium. This shows how the AUD has been moving not only against fundamentals, but also against other global risk assets.”

“Risk premium is heading back towards its peak from late 2014, again highlighting that the AUD is not adjusting to its fundamentals, whether that be commodities, or global risk appetite.”

“Should this shift in language occur it will support our current recommendation to be short AUD/NZD.”

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