RBA this week: strength of Aussie a concern - Westpac

Analysts at Westpac noted that The Reserve Bank's Board meets on August 1.

Key Quotes:

"No doubt the Governor will continue to “call out” the labour market and the housing markets as the key areas of interest. In that regard the sentiment in the July Board Minutes and the Governor’s July Statement is likely to be repeated. On housing, “Conditions varied considerably across the country. Housing prices have been rising briskly in some markets, although there are some signs that these conditions are starting to ease ….” On the labour market, the commentary is likely to be along the lines of the Minutes, “Labour market conditions had improved … forward indicators had remained positive…….The strength of recent labour market data had removed some of the downside risk to the Bank’s forecast of wage growth.” However on that latter point the Governor’s speech on July 26 indicated that there was limited confidence in the call that wage rates would gradually increase over the course of the forecast period. 

And then, of course, there is the Australian dollar. Since the last Board meeting the AUD has increased from USD 0.76 and a TWI of 65 to USD 0.795 and TWI of 67. Even at USD0.76 the Governor repeated his consistent call that “an appreciating exchange rate would complicate this adjustment.” The language is likely to strengthen at USD 0.795. In his speech on July 21 the Deputy Governor noted: “a lower AUD would be helpful.” In mid-2015, when the AUD was adjusting, the “path” from USD 0.80 to USD 0.75 was consistently associated with: “Further depreciation is likely/necessary.” 

It seems likely that the “commentary” on the AUD in the Governor’s Statement will be stronger than we have seen recently but we cannot be sure that a new “terminology” will be adopted. Be clear that even though the move in the AUD is associated with higher commodity prices, the RBA is uncomfortable.

The clear offset to services; manufacturing; and agricultural exports that we might expect from higher commodity prices is not materialising. Cashed up mining companies are not reinvesting and are not lifting employment in this cycle largely because they are not convinced of the sustainability of the current increases. As such the higher AUD is a “challenge” for both growth and inflation.""