Last night the Australian dollar fell to a new low in its recent decline to $1.02 before rebounding. The fall was encouraging because it was across nearly all of the crosses:
It’s difficult to ascribe this to any one cause given the wild volatility in markets this week but the weakening currency can only have been encouraged by Guy Debelle yesterday. Although his speech was dollar neutral, in the Q&A afterwards there were signs that the RBA jawbone is finally being sent into battle:
THE Reserve Bank will consider taking up arms in the global “currency war” if the Australian dollar rises much further, suggesting it could flood the foreign exchange markets with newly printed money.
Reserve Bank assistant governor Guy Debelle yesterday conceded the Australian dollar was “somewhat on the high side” as a result of quantitative easing – or the creation of money – by other countries, but said the bank could easily act to limit the dollar’s rise.
“There’s no limit on our ability to supply Australian dollars,” he said in a speech at Adelaide University yesterday.
“We have more Australian dollars than anyone else in the world because we print them,” he added, pointing out that Switzerland had successfully capped the value of the Swiss franc against the euro since 2011.
However, it is important to note that this report is wrong in one respect. The comments were not in the speech, which was explicitly dollar neutral. The comments must have come in the Q&A. This suggests that this is not any official deliberation but rather the ruminations of just one guy (if you’ll pardon the pun).
Last week in parliament, Capt’ Glenn made it very clear that markets should not interpret statements by individual board members as RBA policy. He declared emphatically that only he represented the RBA view. What’s more he was bullish on the effect of rate cuts to date as well as the prospects for negotiating the mining investment cliff.
Yet more individual ruminations arose yesterday from another RBA board member, Roger Corbett, that were dollar bullish:
“You don’t adjust fiscal and monetary policy in my view to force the dollar down because if you do that you will do enormous damage…I think you should treat the dollar as a balancing factor and you should take all the other decisions, including interest rates, to be determined by a whole set of factors…The dollar shouldn’t be a driving factor…If I was a manufacturer I’d be putting an argument to reduce rates still further so the dollar came down. However, that will then cause a property boom-and-bust-type syndrome, which would be far more damaging to the economy than where the dollar is. Very clearly, the rate of growth in investment in the resources sector, which has been a major driver, is unlikely to continue at the rate it’s going. I think there might be a little bit more resilience there than people may have expected.
It is tempting to conclude that markets pay more attention to senior RBA staff members than they do outside board members. They probably should. Despite the pot-stirring of certain vested interests, my understanding is that the RBA decision-making is dominated by its staff. The outside members of the board are not irrelevant but are a supporting cast.
What is clear from these varying RBA utterances is that the bank is not engaged in a jawbone offensive. Imagine the effect on markets if all of the above statements, plus recent whispers from Heather Ridout and John Edwards, not to mention the Treasurer (who is happily queering the pitch with a defense of QE today), were all directed at one simple message: that the Australian dollar is not a one-way bet.
The slow moving debate around adding new tools to the RBA armory, such as macroprudential measures, is perhaps understandable from the perspective of institutional caution. But the missed opportunity to simply talk down the dollar in a coordinated fashion is a failure of leadership.