The RBA decision today came in as expected, with no change in the cash rate target and key comments in the accompanying statement remaining.

What is notable, though, is the “Reserve Bank of Australia has hardened its position on the need for the Australian dollar to fall”.

From the Australian Financial Review:

  • Governor Glenn Stevens declared that a lower dollar was “likely to be needed”
  • The use of the word “needed” is significant, as the bank has previously only talked of why it’s relatively high level was providing “less assistance than would be normally expected”
  • His remarks on commodity prices and the urgent need for a lower dollar represent a subtle but important shift of emphasis.
  • The wording indicates the board is again open to potentially rate cuts in 2015 if economic data continues to disappoint
  • Triggers for a cut would include ongoing strength in the dollar, … further delays in the timing of a rate rise by the US Federal Reserve

Similarly, from Westpac:

  • there were notable changes around the exchange rate (comments)
  • Firstly and most importantly … “A lower exchange rate is likely to be needed to achieve balanced growth in the economy”
  • Secondly … “differences in monetary policy across the large jurisdictions are affecting markets, particularly exchange rates”
  • And finally, commodity prices are described as having “declined significantly in recent months”
  • There was some speculation that recent falls in the AUD would have sufficed the RBA. However, recall that in November last year the Governor indicated that USD0.85 would be a fair value for the AUD at a time when the iron ore price was around USD135/tonne. With the iron ore price now around USD70/tonne clearly the Governor would like a significantly lower AUD than today’s USD0.85. No target value has been indicated by the Bank.
  • Concerns around differences in monetary policies would largely be targeted at the recent lift in quantitative easing from the Bank of Japan and signals that the ECB is planning a similar strategy. As the Bank consistently argued at the time of the Fed’s QE these policies of excessive liquidity creation by central banks often attracted flows into high interest rate currencies and were largely responsible for the AUD remaining overvalued in recent years

And, further, via MNI:

  • “The Reserve Bank is prepared to cut the cash rate to a record low to offset the tightening impact of a high exchange rate as commodity prices fall.”
  • A case for cut has not yet been made … But the need for a lower cash rate is increasing because the RBA considers the exchange rate to have fallen “only a bit” and thinks it still has a “lot further to go”

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Despite the more forceful language on the AUD … it is now making new highs since the statement, around 0.8535 as I write. The jawboning not working … at least yet.