ANZ on RBA monetary policy, Aussie and its performance versus U.S. and New Zealand Dollars

We believe the Australian Dollar is ultimately heading lower, as weaker domestic economic fundamentals give way to a better global environment. However, September brought with it new risks, including the results of China's review of its banking system. Such events are set to direct investors' tolerance for holding risk and with that the outlook of the Aussie Dollar, after what is now long period of stability in FX over the Northern Hemisphere summer.

The hurdle for another rate cut is relatively high, given policy is already at a very stimulatory setting, although we continue to see downside bias to rates and are forecasting a possible rate cut at the November board meeting. The path of the nation's currency remains a dynamic part of this assessment, with the Bank's clear preference being for a lower Aussie.

The AUD/NZD has been captive to the relative monetary policy outlook in recent months. With the RBA expected to ease further and the markets increasingly expecting the RBNZ to hike, AUD/NZD has fallen to around 1.12 as interest rate differentials collapsed in recent weeks. Although the New Zealand authorities' new macro-prudential measures should alleviate some pressure on the RBNZ to act, as well as possibly deterring foreign investment for the time being, ultimately the NZ economy remains in a better place than the Australian economy. Central to this story is the rotation of growth in China from investment to consumption. It will see relative demand for hard commodities such as iron ore and coal decline while demand for soft commodities such as milk and proteins will increase.

Our forecast for December 2013 is for the AUD/USD to be at 0.88.