Calibrating monetary policy is hardly ever an easy task, and never more so than in Australia at the present time. The high exchange rate, together with the increasing trepidation being displayed by consumers, has contributed to a further substantial reduction in the RBA’s expectation for growth in the current year. Although mining sector investment remains exceptionally buoyant, the RBA now expects GDP growth of just 2% for the current calendar year, compared with an estimate of 3.25% made just three months ago. At the same time, the Australian central bank still has genuine and entirely understandable concerns regarding inflation, which it suggests could reach 3.5% YoY in the final quarter. It is also conscious of the gathering international storm-clouds, especially the deepening debt crisis in Europe. For the Aussie, these changes to the RBA’s read on growth and inflation weighed on the currency overnight. In almost the blink of an eye, the Aussie has dropped from the very top of its recent trading band to the very bottom. Notwithstanding the tremulations in global financial markets over recent days, confidently asserting which end of the 1.04-1.10 trading range will ultimately break remains a very difficult call.

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