AUD will depreciate, but not ahead of the December Fed meeting – NAB

Research Team at NAB, expects Australia’s monetary policy is expected to remain highly expansionary, although NAB don’t expect any further cuts this year, barring a surprise exceptionally low Q3 CPI print (due on October 26).

Key Quotes

“For now, the RBA will be content to assess the impact of cuts in May and August, keeping a particularly close eye on house prices which have reaccelerated again in Melbourne and Sydney. By mid- 2017 however, it remains likely that the RBA will be confronted by ongoing weak inflation and a softening outlook for economic activity into 2018. This is likely to see the RBA (reluctantly) implement two further 25bp cuts to the cash rate in mid-2017. Discussion may then turn to unconventional policy.

The new RBA Governor and the Treasurer have signed an updated Statement on the Conduct of Monetary Policy. The formulation of the inflation target remains the same at 2-3% on average, but the length of time for the target has been tweaked from “over the cycle” to “over time”. Financial stability considerations have also been explicitly brought into the monetary policy objectives paragraph along with an inference to inflation expectations. Overall it is suggestive of little change in direction; perhaps a little more flexibility at the margin.

The Aussie dollar remains comfortably contained within the broad 0.7450 - 0.7750 trading range established over two months ago. Barring an extremely low Q3 Australian CPI print (due on 26 October) a range break-out in AUD/USD will likely have to emanate from the USD side of the equation and suggesting the current range could well survive until after the 8 November US election. Ultimately, we still see the (inevitable) break coming to the downside. We retain our forecasts for AUD/USD of 75 cents for end-2016, 70 cents by end-2017 and hitting a low of 68 cents in mid-2018 before inching back up.

In the first RBA meeting under the Governorship of Phil Lowe, the language on the currency in the post meeting statement was little changed. The statement noted that ‘the lower exchange rate since 2013 ‘has been helping’ the traded sector’. Previously the wording was ‘is helping’. It’s possible this nuance reflects the fact (which they acknowledge) that the terms of trade has recently been rising once again.”