Westpac argues that the RBA has already used up its best opportunity to limit the aussie currency strength over the next six months
The firm's senior currency strategist, Sean Callow, says that in electing to make an early decision by increasing QE earlier this month, the RBA had used its best shot to prevent further gains in the currency in the next six months or so.
Adding that the central bank knows that AUD outperformance is likely if the market anticipates a global recovery, so "it is not realistic to expect a soft currency in that scenario".
Hence, the RBA is trying to get ahead of the curve to avoid a return to a scenario such as that in 2011 where AUD/USD pushed to 1.10. However, the firm says that such a similar outcome is unlikely with "the best the RBA can hope for is a move to the low 80s or so".
With regards to the RBA, I would say that they have hit the nail on the head as the central bank is left with little else in turning the dovish dial any more than they have now.
The present situation doesn't call for negative rates so that makes it difficult for policymakers to communicate a much softer tone to jawbone the currency lower.
That is keeping the aussie underpinned, alongside the resilience in risk trades as the reflation narrative takes hold. The dollar's strength amid higher yields is an outside risk to the outlook though, but should AUD/USD buyers get above resistance at 0.7800-20, there is little in the way of a push towards 0.8000 next.
In this environment though, I'd much prefer AUD/JPY and AUD/CHF longs if one is to bet on the reflation narrative and further aussie gains in the bigger picture.
