Deliberating on the Aussie Dollar

The Australian Dollar was sent lower today with traders and pundits pinpointing comments from RBA Governor Glenn Stevens that the board had "deliberated for a long time to leave the cash rate unchanged."  Some are suggested that this was in fact a joke, with the straight faced delivery of Glenn Stevens perhaps lost on the audience.

While the off-the-cuff remarks weren't intended to elicit this reaction, it is unlikely that the RBA will be upset.  A much weaker dollar is a prerequisite for growth to get anywhere near close to the RBA's current forecasts, which even with a weaker dollar look optimistic.

Governor Stevens also highlighted the prudent behaviour of households in his speech and this was reflected in the May retail sales data.  Gains in the month were meek and consumption activity in Q2 looks soft when combining lower auto sales into the picture.

This prudence is healthy for the economy when investment is booming on the back of a 1 in a 100 year terms of trade boom.  But continued prudence is not good at a macroeconomic level when that boom is unwinding, as it is now.

To be sure, as unemployment rises, it may be increasingly challenging for the RBA to maintain current consumption growth rates given the household deleveraging is still ongoing. It will be difficult to coax households on masse into stronger spending

So in short, risks to the AUD still look firmly to the downside.