AUD vigilant against RBA’s stance turning dovish

The Australian dollar (AUD) will be paying close attention to the Reserve Bank of Australia (RBA) meeting today. With CPI below the official inflation target of 2-3% for the fourth straight quarter in 3Q15, the central bank may have to revisit its stable rate stance. Real GDP growth also slowed to 2.0% (YoY) in 2Q15, its slowest since 3Q13. The RBA, according to its latest minutes, expects growth to improve in 3Q15 (which is scheduled for release on 2 Dec).

Markets, on the other hand, do not share the RBA's optimism. Rate cut expectations are reflected by the 2Y bond yield and the implied yield for 90D bills futures Dec16 falling below 2%. That said, markets are looking for the cut to come only in 2016.

As for the AUD/USD, its fate is tied more with the Asian currencies, where some 70% of its exports head to. In contrast to trade surpluses in Asia, Australia's trade deficit significantly widened to AUD 21.6bn in Jan-Aug15 from AUD 9.1bn for the whole of 2014. This puts its current account deficit on track, for the first time since 2012, to exceed 4% of GDP this year. With the USD underpinned against Asian currencies by monetary policy divergences again, AUD/USD has retreated from its high of 0.7382 on 12 Oct to 0.7157 this morning. For the medium term, we see AUD/USD eventually falling below 0.70 in 2016.