The Australian dollar fell to a two-and-a-half-month low after the head of the Reserve Bank said he has an open mind on intervening to get the currency lower.
In early-morning trade, the Australian dollar fell as low as 91.99 US cents, its weakest level since September 9. At 0720 AEDT, the local unit was trading at 92.23 US cents, down from 93.04 cents on Thursday.
In a speech in Sydney on Thursday night RBA governor Glenn Stevens again said the high exchange rate is not helping the economy. He did not rule out selling Australian dollars to buy foreign currency in order to weaken the exchange rate.
"In this episode so far, the bank has not been convinced that large-scale intervention clearly passed the test of effectiveness versus cost," Mr Stevens said.
''But that doesn't mean we will always eschew intervention. In fact we remain open-minded on the issue.
"Our position has long been, and remains, that foreign exchange intervention can - judiciously used in the right circumstances - be effective and useful.
''It can't make up for weaknesses in other policy areas, and to be effective it has to reinforce fundamentals, not work against them. Subject to those conditions, it remains part of the tool kit."
The speech “suggests markets should probably give further consideration to the set of conditions that might push the RBA to reach deeper into its toolbox”.
The Reserve Bank of Australia "could be leaning" against the Aussie already, Gareth Berry, a currency strategist at UBS, wrote in a note to clients yesterday, citing central bank foreign exchange transactions for October. They showed the bank had sold a net $330 million worth of Australian dollars, "highly unusual" and the biggest unbalance in over four years, Berry said.
"This latest evidence now suggests that the RBA's patience may be running out, and that the central bank may have finally begun to lean against the wind - albeit very gently," Berry wrote in the note, which was sent before Stevens' speech.
Dust just settling from the 2033 $6 bill in gov bonds issued earlier this week!
I don't know what they will do, but what they can do is simply print dollars and then use them to buy foreign currency. That builds up our supply of foreign currency and pushes our dollar lower.
Any expressed market opinion is my own and is not to be taken as financial advice
I don't know what they will do, but what they can do is simply print dollars and then use them to buy foreign currency. That builds up our supply of foreign currency and pushes our dollar lower.
Catweasel say mouse could have sold the up,
12-18 month ago,
throw all in a NZD linked to a NZSE50 ETF,
and mouse would be much better off than dreams of mouse house price orgy.
But a seminars and press releases not the mention.
If world can be the easily predicted,
as mouse house price in a Australia,
it the be like gifting money trees with voucher for free happy meal.
Last night Reserve Bank of Australia governor Glenn Stevens declared currency intervention to be a part of the bank’s “tool kit” but said the board was not yet convinced large-scale intervention passed the test of effectiveness versus cost.
In a wide-ranging speech covering the 30-year period since Australia moved to a floating exchange rate regime, Stevens escalated the Reserve Bank’s attempts to talk down the high Australian dollar. Following the speech, the dollar tumbled through its support level against the US dollar to be a little above 92 cents.
Stevens began his one-man battle against the exchange rate during a speech at a Citi Investment Conference on 29 October. Since then, the Australian dollar has depreciated by around 4 per cent against the US dollar, and by more than 2 per cent against a trade-weighted index of foreign currencies. Last night represented a welcome escalation of the bank’s rhetoric, which I was concerned risked the prospect of diminishing returns (Diminishing returns for the Reserve?, November 19).
The Australian dollar is down around 11 per cent against the US dollar since the end of April but remains well above the level necessary to facilitate a smooth transition from relying on the mining sector towards the non-mining economy. In a recent report, the International Monetary Fund said that the Australian dollar was overvalued by around 10 per cent – which points to an implied level of around 85 US cents.
The outlook for the Australian dollar is intrinsically tied to the “extraordinary monetary policy measures that are being undertaken in the major economies of the United States, Japan and the eurozone”. Unless the likes of the Federal Reserve begin tapering their massive asset purchasing programs, the Australian dollar will remain at an elevated level. The longer the Fed delays tapering the more likely the RBA is to intervene in markets and I suspect uncertainty surrounding the taper is probably delaying any central bank intervention. The Reserve Bank is hoping that jawboning currency markets will be enough in the near term to keep the dollar down until the taper begins.
Another complicating factor is the high terms of trade, which historically has been a key driver of the exchange rate, as the graph below shows. The long-run equilibrium exchange rate in the graph is a function of the long-run dynamics between the exchange rate, the terms of trade and the interest rate differential (though the terms of trade is the major driver). The model suggests that based on the current level of the terms of trade that the Australian dollar is not hugely overvalued.
The main concern for the Reserve Bank right now is the cost versus benefits of direct intervention. On one hand, if the dollar is overvalued then intervention will be beneficial given the central bank will be selling Australian dollars high, while buying foreign currencies low. On the other hand, there are costs involved.
“Intervening against the Australian dollar would have involved selling Australian assets yielding say 3 per cent, and buying foreign assets yielding much less – in fact, earning almost nothing over recent years,” Stevens said. “This ‘negative carry’ would be a cost to the bank’s earnings and therefore Commonwealth revenue.”
So these two factors compete to determine whether an intervention is profitable or not. The greater the overvaluation the greater the profits that the Reserve Bank will reap. But it is also important to recognise the additional benefits of policy intervention: higher GDP growth. Because that is what this is all about. We want a lower exchange rate to improve competitiveness and boost growth. The RBA bottom line is important and shouldn’t be disregarded but it is not as important as the economic wellbeing of the country.
The Reserve Bank’s effort to jawbone currency markets has been successful thus far, but there are limits. Words will not be enough to lower the dollar to 85 or 80 US cents. The unwillingness to intervene so far indicates that the central bank is either not convinced that the dollar is overvalued enough to warrant the investment or believes that the Fed will begin tapering soon enough that intervention is not necessary.
The former is not true, given the Reserve Bank’s profitability is largely determined by foreign exchange movements, not to mention the broader economic benefits. So the RBA may be relying on other central banks to do the right thing. But perhaps it is time it put its money where its mouth is and took back control of its own future. It is time to provide a little relief for Australia’s struggling industries.
I don't know what they will do, but what they can do is simply print dollars and then use them to buy foreign currency. That builds up our supply of foreign currency and pushes our dollar lower.
Its risky for us to even play that game. Scare away foreign money and our banks are just as stuffed. Glenn will continue to work that jawbone and keep his fingers crossed. The RBA (and APRA) have gone past the point of being able to engineer a soft landing. Let's all just hope the chinese miracle keeps on being miraculous.
The Australian dollar is on track to record its biggest monthly loss against the US dollar since June, amid Reserve Bank jawboning, rising Chinese interest rates and heightened expectations of near-term Federal Reserve stimulus reductions.
The local dollar is trading near three-month lows against the US dollar and euro, and it's the second-biggest loser against the two currencies this month.
It has shed 2.79 per cent against the US dollar and 2.54 per cent against the euro in November, and is only 3.09 per cent higher than its year's low, just under 89 US cents in late August.
''The Australian dollar is more clearly in a bear market,'' RBS senior currency strategist Greg Gibbs said in a note today.
''[It's] reflecting the evidence that Australia's resources investment cycle is in decline, a sense that the restructuring [and] reform process in China is likely to see a steady decline in its growth over the medium-term and its reforms increase risk of a significant disruption to growth.''
China is Australia's largest trading partner and its push to transition away from investment-led growth is seen as having a negative impact on the local economy.
The RBA's attempts to talk down the dollar over the past month, which cumulated in governor Glenn Stevens raising the possibility of intervening in foreign exchange markets last week, also weighed on the currency.
Jawboning, a verbal form of pressure to talk up or down something, is not unique to the RBA and has been also used by other central bank officials.
The Reserve Bank officially acknowledged intervening in foreign exchange markets in 2007 and 2008 during the financial crisis. In 2008, the central bank bought $3.7 billion and in 2007, it bought $300 million, Barclays chief economist Kieran Davies said.
''This intervention was an attempt to calm disorderly markets, where the bank was trying to ensure the depreciation of the exchange rate at the time was orderly, without 'excessive price gapping','' Mr Davies said. In late 2008, the Australian dollar lost 40 per cent of its value against its US counterpart.
Unofficially, the RBA is believed to have intervened in foreign exchange markets in 2012, when it accepted an estimated $1 billion deposit from another central bank, Mr Davies said.
I don't know what they will do, but what they can do is simply print dollars and then use them to buy foreign currency. That builds up our supply of foreign currency and pushes our dollar lower.
No they won't. Since Basel one they have printed no more that 7% more cash pa on average. It appears they are under an obligation to print no more while the AUD is a floating currency. Printing as one pleases means leaving the floating standard and returning to a currency fix against the USD or the Euro.
The rate of printing was twice as high in the 70's and nominal house prices tripled during the decade. Now at half rate printing it takes 2 decades.
The next trick of our glorious banks will be to charge us a fee for using net bank!!! You are no longer customer, you are property!!!
the RBA is going to leave as much ammo in the chamber as it can. it's one reason the bears are idiots for thinking housing will suffer some 50%-70% crash.
the RBA has plenty of fire power left to deal with just about anything, and that stockpile of ammo just keeps getting bigger the more time passes
I am the love child of Tony Abbott and Pauline Hanson
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