The Sun’s Terry McCrann has published a great column on the nomination of Yellen and what it might mean for the AUD. The AUD bottomed in early August at ~89c, and has rallied back to ~94c due to the fed’s easier stance, the improvement in Chinese data, and the post election confidence pop.
Given the amount of pessimism out there regarding the AUD, it seems possible that it will break above 95c on nothing more than positioning (grinding out the haters). The move so far has been broadly in keeping with a recovery of AUD commodity prices, but another 5c higher, as McCrann contemplates, would constitute an unwelcome tightening of financial conditions, and may well undo the post-election elation we’ve seen.
In that case, it seems unlikely that 1.00 for the AUD and 2.5% for the cash rate would stabilise the unemployment rate and keep inflation around 2.5%.
McCrann says it is too early to think about a November cut, and i think he’s right – but if monetary conditions tighten, confidence slips, and house price appreciation slows (it may merely be a reset higher in price due to lower rates), it’s easy to see another cut in Q1’14.
Regardless of if 2.5% is the cash rate low, i think it’ll be a long time before we see cash rate above 2.5% (earliest hike looks like 2015 just now).
The RBA would have to contemplate whether than mix is sufficiently positive for the economy that it overrides the negative impact of a dollar at or near parity.
But if not, if unemployment heads back over 6 per cent, it would grit its collective board teeth and cut its official rate.
It doesn’t want to cut further. It does not want to further hit savers, nor provide more fuel for property buying.
But it will if it has to; and a broad brush, a dollar at parity, it would probably have to.
It would also then likely contemplate imposing quantitative restrictions on home lending. Like a minimum deposit requirement.