Aussie Dollar Slumps After RBA Jawboning

The Australian dollar fell to its lowest levels since August 30 on Friday, following comments from RBA Governor Glenn Stevens.

AUD/USD appears set to close its eighth-straight week of declines Friday, the longest weekly losing streak since 1985.

The Aussie weakened after the Australian Financial Review quoted Stevens saying that the RBA prefers a fall in the value Australian dollar over lower interest rates, as a means to stimulate the economy.

See also: Gold Surges Higher as US Dollar Softens

Stevens said, "To the extent that we get some more easing in financial conditions, at this point it's probably more preferable for that to be via a lower currency at the margin than lower interest rates."

Addressing the price level of the Australian dollar he stated, "I thought US85¢ would be closer to the mark than US 95¢ ...but really, I don't think we can be that precise."

The report suggests that the RBA is more likely to keep interest rates on hold in coming months, after having reduced rates by 2.25 percentage points over the past two years.

RBA Intervention

Speaking to the Australian Business Economists annual dinner in Sydney in November, Stevens said he was "open minded" on intervening to weaken the Australian dollar.

"Overall, in this episode so far, the Bank has not been convinced that large-scale intervention clearly passed the test of effectiveness versus cost. But that doesn't mean we will always eschew intervention."

See also: Yen Recovers From 6-Month Low

He added, "Our position has long been, and remains that foreign exchange intervention can, judiciously used in the right circumstances, be effective and useful."

In the December RBA policy statement, Stevens reiterated his opinion that the exchange rate was “uncomfortably high."

Economic Challenges

Australia currently faces the challenges of falling consumer confidence, increasing unemployment and a slowdown in mining investment. Australia's unemployment rate rose to 5.8 percent in November from 5.7 percent in October.

Yuan Record Highs

Earlier in the week the Aussie was buoyed briefly on news of the Chinese Yuan rising to new record highs against the U.S. dollar. The Australian dollar has a strong correlation with the Chinese yuan due to the fact that China is Australia's largest trading partner.

FOMC Meeting

Speculation that the U.S. Federal Reserve will begin scaling back its $85-billion monthly bond buying program in the near future is another factor weighing on the Australian dollar. The December FOMC meeting is scheduled for next week, on December 17-18.

AUD/USD Daily Chart

Looking at the daily AUD/USD chart we can see that price is slightly above potential support of the prior low of 0.8890. Momentum indicator RSI is showing a reading of 30, close to oversold conditions on the daily timeframe.