RBA’s hand will likely be forced again in 2017, weighing on the AUD - NAB

Research Team at NAB, suggests that as per last month, they now expect that the RBA will be forced to ease monetary policy again through 2017.

Key Quotes

“This will mostly be in response to the expectation that underlying inflation will run below target for more than two years, but also the need to prevent a rise in unemployment as the economy loses some momentum in 2018. This is particularly the case after recent rate cuts in which the RBA has clearly demonstrated its commitment to its inflation target (of 2-3% over the course of the cycle).

Deputy Governor Phil Lowe will have taken over from Glenn Stevens as the new Governor of the RBA by the time of the next meeting. No significant change in the RBA’s mandate or position of the economy is expected, although there is some possibility of changes, particularly in the RBA’s communication style or in the detail of the forecasts.

NAB has revised its exchange rate forecasts over the past month, and now expects the AUD to hold up through the remainder of 2016, before easing to USD70c by end-2017 in response to a higher USD following an expected Fed rate hike in December, rate cuts from the RBA in the middle of 2017 and another leg down in key commodity prices such as iron ore through 2017. The currency is then expected to broadly stabilise through 2018, with our new forecast at USD69c by end-2018. Volatility over the past week however does suggest some modest downside risk to our latest target for AUD/USD of 75c by the end of this year.

We also note that a recent speech from the RBA’s Chris Kent emphasised that the trade weighted index (TWI) may have appreciated a little further than fundamentals such as commodity prices and interest rate differentials have suggested in recent months. Our models however suggest very little “overvaluation” at present, with estimated fair value currently sitting at approximately AUD/USD74c. In any case, periods in which the RBA has highlighted overvaluation have often been followed by jawboning of the currency, which markets should be alert to, and the currency is also a key influence on RBA decision-making at present given the desire not to impede the recovery underway through the non-mining economy.”