The Reserve Bank of Australia opted on Tuesday to keep interest rates unchanged at 2.00%.

Key Australian dollar exchange rate pairings swung widely on the news but ultimately stabilised around pre-announcement levels.

It is widely argued that just keeping interest rates on hold will not be enough to help the Australian dollar recover from its recent decline and the path forward is lower against the likes of the US dollar and pound serling.

Pressures continue to be exerted by both domestic and Chinese data; last Friday the headline Australian v US dollar exchange rate dropped to new lows for the year, and today it hit a new trough at AUD/USD 0.7435.

“These were levels last abandoned in 2009. We continue to expect the exchange rate to drop towards the AUD/USD 0.70 mark,” says a morning brief from Intessa Sanpaolo.

The British pound to Australian dollar exchange rate (GBPAUD) is meanwhile trading at 2.074 having achieved its best exchange rate in since 2009 in the immediate aftermath of the Greek ‘no’ vote.

The Australian dollar is a ‘high-yielding’ currency and is therefore susceptible to sell-offs in risky environments such as that generated by Greece.

Watch developments in the Eurozone for immediate direction in the Australian dollar.

Please note that all currency quotes in this piece reference the spot market. Your bank will subtract a spread when passing on currency for transfers. An independent will however seek to undercut your bank’s offer thereby delivering up to 5% more FX in some instances.

RBA Cannot Act, But Downside Pressures Remain

Looking ahead to the RBA event, “the RBA meets on Tuesday and we expect it to keep the cash rate unchanged at a record low of 2%. We think that the RBA retains an easing bias, but seems happy to stay on the sidelines given the strength in house prices,” suggests Hamish Pepper at Barclays.

There have been strong talks from RBA officials on house prices lately, but board member Edwards’ recent comments suggest to us that if the RBA saw an economic need for a further cut, then it would act despite its deep concern over house prices.

While RBA is likely on hold and rate cuts may not provide the impetus for further AUD depreciation, Barclays believe that several other factors should weigh on the currency going forward including: weak non-mining activity; deteriorating risk conditions; and worsening overvaluation due to poor trading partner growth and continued declines in commodity prices.

“We remain short AUDUSD spot position targeting 0.70,” says Pepper.

Australia labour market data (Thursday) is likely to be relatively soft as the unemployment rate increases to 6.1% in June from 6.0% in May (consensus: 6.1%) and the economy adds just 5k jobs (consensus: no change).

Commodity Prices, China and a Negative AUD outlook

Furthermore, Barclays' research suggests the Australian dollar is overvalued in the context of commodity prices and Chinese demand.

Indeed, the RBA continue to note that further currency depreciation “seems both likely and necessary, particularly given the significant declines in key commodity prices”.

Australian export volumes, which had held up well until recently, fell sharply in April as Chinese demand continues to slow.

Chinese nominal import demand from Australia serves as an important indicator of both current and future demand for AUD and as such, tends to exhibit a strong relationship with AUDUSD returns.

China’s lower demand for imports is mostly explained by softening domestic demand.

“Our own long-term fair value model currently suggests the AUD is currently 11% overvalued on a real trade-weighted basis. Much of the AUD outlook depends on the path of commodity prices. As China’s growth moderates further (note our GDP forecast is 6.8% for 2015) the outlook for key commodity imports is likely to worsen,” says Pepper.