RBA Likely To Be Aware Of Strong AUD Risk

Ahead of the RBA decision tomorrow, Bank of America says that a need to avert further currency appreciation will be a concern for RBA board members. The note makes several points on how a strong AUD could be concern to the RBA:

• "A failure to extent (sic) QE would result in an unwelcome tightening of financial conditions via the currency and financing costs for governments. Debelle said that a reason for adopting QE was that "longer-term Australian government bond yields were higher than those in other advanced countries." This provided evidence that "the size of central bank bond purchase programs was affecting longer-term yields beyond the anchoring effect of the Bank's 3-year yield target. This in turn was contributing to a higher exchange rate." AU bonds yields are back above US equivalents beyond 8-year tenors."
• "The focus on market rate differentials and a smaller QE program relative to GDP compared to central banks is a major reason why we expect QE to be extended beyond the current program. Without it, further appreciation of AUDUSD toward 80c would most likely be seen as an "unwelcome" headwind to recovery."