AUD/USD and RBA: Levels, Ranges, Targets

Australia and New Zealand are the smartest central banks because they run, they know and they take the long view to their data. Both central banks see the data, trends and adjust accordingly for the future. While the FED and Europe and many other central banks fall further into a deep sleep, Australia and New Zealand remain hard at work.
Prior to August 2016 when the RBA dropped OCR to 1.5, an unsustainable AUD/USD traded at 0.7800 and 0.7900’s. Upon the drop, AUD/USD traded 617 pips from 0.7779 to 0.7162 lows. Minus the high / low extremes , AUD ranged 561 pips from 0.7758 to 0.7197.
What’s special in regards to high 0.7700’s is a 1999 line at current 0.7795 forced AUD lower in line with the OCR drop. In August, this line held at 0.7802 and only within the last months has this point began a slow descent. Only matter for a lower exchange rate for the RBA and to drop below 0.7802 was lower OCR.
Lower AUD assisted in a decent export boom and with current China into renewed spending with hope for economic success, Australia benefits to sustain export growth. The exchange rate is only one factor to the AUD story.
Higher exports to AUD informs the wide distance that previously existed between Trade Ables and Non Trades compressed. Without this compression, exports suffer and exchange rates aren’t the overall factor.Why? Because Trade Ables and Non are the variations between low and high Inflation rates. If Inflation is running high in Australia then Trade Ables run generally high which means prices in produced goods are not only to high but produced prices are eroded by Inflation.
The perfect combination for Australia is low exchange rates, low Inflation, low Trade Ables then a low price means production has a value and exports skyrocket. Its a short distance between Trade V Non but this is where and how Australia and New Zealand’s economy operates. Both operate inside the channel.
The key for both is to maintain the proper level of the exchange rate. An exchange rate traded above or at Trade Ables won’t work. Wide distances between Trades V Non won’t work. Likewise, an exchange rate to low won’t work but its not an issue at the moment. If the exchange rate falls out of sync to the overall channel then massive ajustments are needed to maintain the economy. This is usually the point when the RBA considers seriously adjusting OCR unless the economic data states otherwise. The RBA and RBNZ know exactly where they stand on the long view. Its quite fascinating to watch.
Note last 2 quarters of GDP were 1.5 and 1.7 against 2.5 expected by the RBA statement. Headline Inflation at 1.5, headline interest rate at 1.5 and 1 month Swap rates at 1.5. Most vital is the 1.5 Swap rate because this is where the RBA is holding the economy and exchange rate by not allowing Swap rates to move.
Since August 2016, Swap rates hardly moved 2 basis points in relation to headline interest. Its an unusual heavy hand of the RBA to do this but its an inward, lazer beam approach with concentration on Australia rather than watch the Chaotic world of other central banks fall apart. GDP 2.5 is only 1 point above the 1.5 Swap rate but this is respectable.
Another aspect to 1.5 Swap Rates is the RBA is still in adjustment to revamp their interest rates and in line with the remainder of the world since the ECB embarked on this course in June 2016.
AUD/USD. The weekly range issued Sunday was 0.7637 to 0.7548. Upon the RBA statement, AUD hit 0.7632 and retreated. The current range is 0.7665 to 0.7573. AUD is running by its own volition which means the RBA is in full control of the AUD ship. A higher Fed funds rate should perform well for the RBA in a lower AUD.
AUD’s overall picture is 0.7795 slowly descends and any price approches won’t see a break higher becase the RBA won’t allow it. Central banks don’t intervene anymore on the exchange rate but control is done through interest rates. Interest rates are the new Interventions.
Two vital points are driving AUD, 0.7586, 0.7547 and 0.7483 below. Below 0.7547, a downtrend begins to target next 0.7527. The resistance points above are many and massive and begin from 0.7618, 0.7630 to 0.7665. What the RBA risks currently is a higher AUD however range indicator are fairly neutral therefore the slow grind in AUD prices will continue.


Brian Twomey