After seeing downside pressure for several months, the Australian dollar rallied on August 4, upon release of a less dovish than expected rate statement. The RBA view the current state of employment growth, economic activity and inflation as satisfactory enough to keep rates on hold. However, because Australia is heavily reliant on resource exports, the economy can be negatively affected by lower commodity prices, especially base metals. By having China as one of its key trade partners, the Australian economy is especially sensitive to fluctuations in demand from the behemoth economy. This is evident in the price of the Aussie dollar – and all commodity-linked currencies – as a reduction in demand from China in recent months has diminished revenues for mineral exporting nations. Iron ore has fallen about $15 per tonne since having a pullback up to $64 in early June. This coincides with an approximate 500 pip fall in Aussie during the same period. Copper – another key export for Australia – is down at $2.36 and making fresh 6-year lows. These metals correlate positively with the Aussie dollar.

Rates On Hold

The Reserve Bank of Australia currently have rates on hold as they further assess the effects of current policy. Having already cut rates 50 basis points during 2015, the Bank is able to refrain from policy change for the foreseeable future. The RBA kept rates unchanged at 2% at the June, July and August meetings. The OIS market currently prices a 13% chance for a cut at the next meeting.

More Dovish Monetary Policy Statement

The most recent monetary policy decision statement, released August 4, was seen as less dovish than previous statements. Firstly, because the Bank did not explicitly indicate further easing was planned; “Further information on economic and financial conditions to be received over the period ahead will inform the Board's ongoing assessment of the outlook and hence whether the current stance of policy will most effectively foster sustainable growth and inflation.” Secondly, because they removed the sentence: “Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices.” This departure from the often heard jawboning by the RBA indicates the exchange rate is now at a level with which the Bank is comfortable. A crucial element of the statement was the Bank's view on inflation, which shows they are under no pressure to cut in the near-term; “Inflation is thus forecast to remain consistent with the target over the next one to two years, even with a lower exchange rate.”