The RBA may not intervene in the FX market just yet

The Australian dollar has been propelled to a resistance zone around 0.9200 against the US dollar after RBA Deputy Governor Lowe held back from talking the Aussie down. While Lowe stated that he expects a further adjustment in the commodity currency and the RBA cannot rule out intervening in the FX market, he added that the threshold for intervention is high. We take this to mean that the Aussie would have to be considered extremely overvalued and negatively impacting growth before the RBA would intervene in the FX market and attempt to weaken it. The comments from Stevens’ no.2 at the RBA weren’t nearly as aggressive as earlier comments from the governor himself.

Overall, we think the likelihood that the RBA will intervene in the FX in the near-term is low, largely because the bank expects the Aussie to weaken naturally and the RBA knows the impact of intervention may be short-lived and that it could be fighting an uphill battle. The bank’s neighbouring central bank, the Reserve Bank of New Zealand (RBNZ), is in a similar situation and it has already attempted to weaken its currency, but with mixed results. The RBNZ has admitted that intervention is being used to take the top off rallies, as opposed to materially weakening the currency, and the long-term effects are fairly limited. In saying that, there have been instances in the past where the RBA has intervened and it has weakened the currency significantly in the short-medium-term, but for the bank to jump in this time around we may have to see further Aussie strength.

AUDUSD rocketed to a resistance zone around 0.9200 – 25% retracement level from the high on the 20th - on the back of Lowe’s comments. There are some signs of intraday strength in the pair, thus a break here could see the pair make a run for another resistance zone around 0.9245 – 38.2% retracement level from the aforementioned high and 100hr SMA - and then higher. However, our overall bias remains lower and any significant rallies may be seen by the market as selling opportunities