Talking Points:

• Aussie Dollar Sold as Central Bank Steps Up Pro-Depreciation Rhetoric
• Markets Appear to Perceive a Hint of Intervention Risk in RBA Tone Shift
• US Dollar Looks to Service-Sector ISM Data to Guide Fed QE Taper Bets

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The Australian Dollar underperformed in overnight trade, sliding as much as 0.5 percent on average against its leading counterparts, after the RBA stepped up its rhetoric against exchange rate appreciation following the central bank’s monthly policy meeting. Governor Glenn Stevens and company opted to keep the benchmark lending rate unchanged, repeating familiar rhetoric outlining the case for additional accommodation but arguing this will materialize as past rate cuts fully filter into the broad economy. Remarks about the Aussie were sharper however, with Stevens saying the currency is “uncomfortably high” and suggesting a lower level is needed to “achieve balanced growth in the economy.”

While this verbiage doesn’t mark a tectonic deviation from preceding policy statements in recent months, it does seem to represent a degree of escalation. Most critically, characterizing the exchange rate as “uncomfortable” is easily the strongest wording to be used so far this year. Characterizing the situation in this way before repeating the “need” for a weaker currency (a stronger rhetorical line premiered in October, in contrast to prior language hinting at the “possibility” of depreciation over time) seems to introduce an activist streak into the RBA’s posture.

Naturally, this does not amount to an explicit call to action and may yet prove to be little more than jawboning. Still, the Aussie’s negative response underscores investors took note of the RBA’s tone shift. Attempts to rhetorically guide exchange rates yield diminishing returns over time absent concrete action, but thus far it appears that traders are taking the RBA at face value. This arguably introduces a fraction of perceived intervention risk into the markets’ AUD outlook that could serve to cap near-term upside potential.

Looking ahead, a relatively quiet European economic calendar is likely to see the spotlight moving on to the US docket, where October’s ISM Non-Manufacturing Composite takes top billing. Economists’ forecasts point to a slowdown in service-sector activity that puts growth at the weakest in four months. Such an outcome would help support calls for delaying a move to “taper” QE3 asset purchases by the Federal Reserve, weighing on the US Dollar and boosting risky assets (notably including the Aussie but also the New Zealand Dollar in the FX space). Needless to say, an upside surprise stands to produce the opposite dynamic.

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--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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