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“Jawboning” the $A

David Bassanese
Wednesday, March 23, 2016

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By David Bassanese 

If this is a global currency war, the Reserve Bank of Australia (RBA) has gone missing in the trenches. We can only hope it not because of not wanting to return fire on our American allies.  

Indeed, it’s fair to say that RBA Governor Glenn Stevens much feared “jawboning” of the Australian dollar in a speech yesterday was disappointingly mild. 

To borrow a Paul Keating quip, for currency traders it was likely being flogged by a warm lettuce.  In his prepared remarks, the Australia dollar did not even garner a mention.  All Stevens ventured to say was that “[global] exchange rates have become more volatile and have been particularly sensitive to shifts in perceptions about central bank actions.”

In response to questions, Stevens did manage to admit there was “some risk” that the $A “might be getting a little ahead of itself”.  The $A rose three tenths of a cent on relief the Governor did not say more. 

What are we to make of this?  

To my mind the RBA has missed yet another golden opportunity to help take the $A down a peg or two.  After all, given concerns over still firm property prices, it would be much better for the RBA to try to talk down the $A than eventually be forced into lowering interest rates. That’s especially so now that the US Federal Reserve has turned dovish again, out of fear it might upset Wall Street and push the US dollar up too rapidly. 

Based on the level of the terms of trade in the December quarter, my estimates suggest fair-value for the $A is now around US70c.

What we really don’t want to see is hot capital flowing back into the country given our still globally attractive interest rates, which in turn would start to undermine recent much needed improvements in trade competitiveness. Local consumer spending it looking up in large part because more of us a holidaying at home and we’ve become a more affordable destination for foreign tourists. 

Given inflation is low and the non-mining trade exposed sectors are only now just getting back on their feet – so where’s the harm in some aggressive jawboning?  This is a (currency) war after all. 

Assistant Governor Guy Debelle did a slightly better job of it a week earlier by conceding the Bank “would welcome a lower exchange rate, like everyone else, in helping rebalancing our economy”

But he then went pacifist, by adding “not everyone can have that."  

So Australia it seems will meekly sit out the global currency wars and let other economies do whatever it takes to get their exchange rates lower. Worse, there are even suggestions that the RBA may have kowtowed to (hypocritical) criticism from the US Treasury over the RBA’s more strident comments on the $A late last year. 

As the US Treasury itself publically revealed earlier this week, it saw fit to “express concern” to Australia during International Monetary Fund discussion in September last year about our “authorities’ public statements on the desired direction of the exchange rate.”  

Helpful US Treasury officials urged us to “avoid statements that could be perceived as inconsistent with their international commitment to a market-determined exchange rate.”

That was a warning shot across the bow if there ever was one: the gall.  

This is from a country that still has official interest rates at near zero levels even though the economy is arguably already at full employment and wage and price inflation is starting to stir. And Fed chairperson Janet Yellen has not been shy expressing concern about overly rapid strength in the US dollar in the past. 

Whether the RBA listened to the US Treasury is unclear. While Governor Steven defended the RBA stance in response to question this week, the fact remains that the RBA rhetoric did notably cool late last year, even though commodity prices were then still getting clobbered. 

Unlike in the previous two years, for example, in a year-end interview with the Australian Financial Review the Governor declined to express a preferred level for the Aussie. And some months earlier the RBA stopped suggesting “further depreciation seems both likely and necessary”. Instead the RBA opted to note “the Australian dollar is adjusting to the significant declines in key commodity prices.”  

Of course, it’s also true the $A had declined from the mid to low US70c level by year-end, so the RBA might reasonably have concluded it needed to engage in somewhat less jaw-boning in any case.

Assessing the $A current level is also somewhat complicated. Clearly, the Fed’s dovishness has helped push up the Aussie. But it’s also true iron ore future prices staging a feisty comeback in recent months.  The RBA might now also feel it can be less aggressive in its views about the right level for the $A.  

That said, I strongly suspect the RBA does not expect the current rebound in iron ore prices to last, and would be surprised if both iron ore and the Australian dollar were not declining again within the next few months.  I certainly don’t believe the iron ore price rebound can be sustained, and the Fed will eventually need to raise interest rates. 

But the longer the A stays uncomfortably high, the greater the risks for the economy.  It would help if the RBA saw the need to put up a better fight in the currency wars. 

Published: Wednesday, March 23, 2016

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