RBA wants to see the Aussie dollar at 75 cents

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Glenn Stevens, the Governor of the Reserve Bank of Australia in an interview with the Australian Financial Review today ruled out any interest rate cuts in the near term. Analysts had started to call for interest rate cuts next year on account of falling commodity prices and the proximity of Australia’s trade with China which itself has started to see a slowdown in activity in recent months. With Stevens ruling out any rate cuts, Stevens further added that last year he wanted the Aussie Dollar near 0.85 to the US Dollar and for the coming year he expects the Aussie to decline to 0.75 against the Greenback.

The comment from the Australian Central Bank Governor comes at a time when the country’s unemployment is still near the highs of 6.3% amidst a slowdown in the country’s GDP. Stevens was noted as saying that the Australian economy was not in a recession despite the recent weaknesses, especially the decline in trade being more than expected and hopes that there will be a turnaround from the temporary slump.

The Australian dollar, besides the Kiwi has been one of the preferred currencies to be long on due to the interest rate differentials, especially against the major economies such as the US, UK and the Eurozone.

Glenn Stevens put to doubt this high yield carry trade as he also commented that the Aussie was likely to fall against other currencies as well.

The Australian dollar has declined as much as 5% since the start of the year, but not before rallying as much as 9% to the yearly highs of 0.949 before the RBA started to verbally talk down the Aussie.

The change in tone and approach from the RBA reflects the fact that the central bank is taking cues from its neighbor, the RBNZ. Despite rising interest rates this year, the RBNZ has been particularly successful in talking down the Kiwi which involved both verbal interventions as well as physical selling of the Kiwi dollar in recent months. The Kiwi government was also supportive of a weaker currency rate, with the New Zealand Prime Minister John Key, calling for 65 cents being the ‘Goldilocks’ exchange rate for the Kiwi Dollar.

It does however looks like the Aussie and the Kiwi dollar won’t need much of a talk down should the FOMC start to provide clues for interest rate hikes expected to start as early as the second half of 2015. The US Dollar has already enjoyed a massive bull run and it is likely to continue this trend into the next year, which should be supportive of a weaker Aussie and the Kiwi dollar.

The US Federal Reserve will be meeting next week for the last monetary policy review meeting for the year. The FOMC statement will also be followed by the press conference with Janet Yellen. Markets will be clued into the FOMC statement as recent conflicting comments from Fed’s members show mixed response in regards to whether to keep the phrase ‘considerable time’ in its December policy statement. Economic data since the last FOMC meeting (which did not follow up with a press conference) has been upbeat with the US monthly nonfarm payrolls consistently higher with a yearly average of 215k jobs. With threats of deflation not posing any immediate risk to the US economy, the Federal Reserve could well be on its path to start raising interest rates mid next year.

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