Aussie Still Overvalued

In its efforts to shore up the Australian economy amid the slump in commodity prices, the Reserve Bank of Australia has focused on reducing the strength in the Australian dollar to remain competitive in international markets. To accomplish this stated goal, the RBA targeted exchange rates by dropping the key interest rate in order to meet the objective of AUDUSD 0.7500. At this point the currency is trading markedly higher after the latest move to cut rates from 2.25% to 2.00% earlier in the month. The Reserve Bank of Australia released minutes from its latest monetary policy meeting overnight, sending the Australian dollar lower after concerns that further rate cuts were inevitable. This comes amid a government budget which is shifting more cost cutting than fiscal stimulus. The Australian dollar has rebounded modestly since dropping, but will likely reflect anticipation of lower rates.

The Swiss Franc is benefiting from a renewed bout of risk aversion as Greek fears bleed from sovereign bonds to foreign exchange. The steep decline in the Euro over the last 36 hours has seen EURUSD decline nearly 250 pips while gold prices remain elevated, maintaining the current divergence from dollar strength. The latest drop comes amid an announcement from the ECB’s Coeure that quantitative easing operations for the ECB will be frontloaded for the next two months as liquidity dries up in the summer months. In a sign that the optimism in the Euro might be tempering, the EURCHF continues to selloff, with large offers driving the rate below the Swiss National Bank’s soft exchange-rate target between 1.0500 and 1.1000. This might mean more aggressive monetary policy measures from the Central Bank as they seek to fend off speculators that drive the appreciation in the Franc.