The appreciation of the Australian dollar is due to looser monetary policy settings and a bounce in commodity prices. The Federal Reserve have taken a more dovish stance on their interest rate hikes, reducing the number of rises from four to two and this is also the reason why the Australian dollar has appreciated recently.
A strong Australian dollar means there is downward pressure on inflation and continued strength in the Aussie dollar could mean that inflation could slip away from the RBA target range of 2-3%. Governor Glenn Stevens stated that continued low inflation will give reason to ease monetary policy.
Inflation has been below the RBA target range for 6 consecutive quarters. In the December quarter inflation rose to 1.7% annualised. March inflation figures will be released on April 27. and the RBA expects that inflation will stay low for the next year or two.
The RBA will look to drop interest rates when the stronger Australian dollar starts having a detrimental impact on the Australian economy. If the strength of the Australian dollar is deteriorating business conditions, this will pose a concern for the RBA.
The RBA has stated that jobs will be key to their interest rate decision. Labour demand has stalled since the start of the year, with the unemployment rate at 5.8%, Governor Glenn Stevens states that labour demand should be strong enough to reduce the unemployment rate further.
The dilemma that the RBA has is that the Australian dollar won't be able to depreciate if other central banks are continuing to ease monetary policy.