At what price does the RBA intervene in the Australian dollar?

FT Alphaville last night wrote the following:

But the strength of the dollar is still a cause for concern, even, it seems, for the RBA.

Following Tuesday’s decision to leave the official cash rate on hold at 3.5 per cent, it noted the exchange rate had “remained high, despite the observed decline in the terms of trade and the weaker global outlook”.

This is the first time the RBA has so implied the dollar is high, or somewhat stretched, relative to trade fundamentals, say local economists. And possibly a signal that if the dollar became really stretched (say $1.35 against its US counterpart, while the iron ore price languished at $100 a tonne) that RBA would go all Swiss National Bank on its own currency.

Neil Hume appears to have pulled these figures out of the ether but it does pose the interesting question about what is the right level to intervene in the dollar. To me, we’re already past it. Here’s the great divergence I’ve pointed to many times in the past few months and taken up yesterday by Gerard Minack:

To me that’s evidence enough. Waiting until the dollar gets to $135 and iron ore to $100 is forcing an economic adjustment you neither need nor want. Indeed, to allow that would culminate in a collapse. China is going to rebalance in next few years. Commodity prices are going to fall too. Very likely both will happen more swiflty than the happy analysts of Treasury of the RBA reckon on.

Why on earth would you hollow out your tradeable sector on the eve of such a shift?

Comments

  1. “Why on earth would you hollow out your tradeable sector on the eve of such a shift?”

    A. To prop up the housing market until you/RBA employees/politicians/BBs can exit

  2. At some point when IO goes to 100 or sub 100 some of those mines would be marginal? If that is the case I’d expect to see the AUD come under pressure. I’ll be amazed if the so called safe haven last for long and the AUD will fall naturally. In the meantime I expect China will keep the flow at lower prices and stockpile as the prices fall even lower.

    Let’s see.

  3. Isn’t the real problem not that the economy isn’t being hollowed out on the eve of such a shift, but that the process happened over the last several decades, and nothing was done back then? Sure, the exchange rate might be illustrating he point now, but when the shoe makers and clothes makers etc. went, years back, the irrevocable process had begun. Having taken manufacturing,the backbone of any economy, is whoever took it likely to give it back? I doubt it. The exchange rate is therefore likely to continue to suffer, no matter what, as a tit-for-tat realignment happens to ensure our propensity to import, continues.

    • With an OCR of 2.5%, John Key hasn’t got all that much to play with! But I suppose the last % or two might take the edge off at the exchange rate. Realistically, NZ has to do what you guys need to do….stamp on the property market…but that’s all too hard in politics.

    • Jeez, why is it New Zealand can talk about policy action to weaken the currency, but its some kind of taboo topic here.

      We have moved way past the point where the benefits of the strong dollar outweigh the costs, and now that the dollar has decoupled from commodities, its only a matter of time before the MineBots start calling for a weaker dollar.

      We’ll know when 3d1k shuts up about how cheap our petrol is.

  4. Fear not! The collapse of the Australian dollar, oil, iron ore etc in late 2008 and early 2009 will happen again really soon. Again it will not be forecasted by the RBA or Treasury.

  5. McKibbin and Minack gettin’ jiggy with Ticky last night.

    http://www.abc.net.au/news/2012-08-07/what-to-do-with-an-overvalued-aussie-dollar/4184032

    McKibben at about 30sec in says intervene because it won’t affect the economy or currency…What?

    and then at 50sec in says “dangerous to intervene because it will create public expectation”

    Clear as mud.

    + Padley gives Ticky the “forget the last 30yrs of debt fueled asset growth” spiel

    http://www.abc.net.au/news/2012-08-07/market-round-up/4184038

  6. Until the RBA cuts rates and makes it distinctly unattractive to hold AUD (“carry”) then I’m afraid any dip on intervention in the AUD will simply offer another buying opportunity.

    • Pretty much impossible to make the AUD unattractive when interest rates around the world are close to zero. If our rates went that low we would have an inflation problem.

      History has shown currency intervention never works and the calls for it are unbelievable given we claim to be a relatively free market economy. Why don’t we bring back tariffs too?..

      • “Why don’t we bring back tariffs too?..”

        that would be awesome, unfortunately they are too many Free Trade Lunatic loonies around our pollies, they re quite happy to sell out Australia’s future for short term gain/or pure ideology.

  7. There seems to to be many voices here leaping in to quickly ridicule those who don’t approve of currency intervention. Those that don’t approve are the Coalition which then invites slurs and other name-calling from some.

    For a “free trade” and “market based solution” advocate that MB is, I cannot understand why such vehemence with that view. It is not logical.

    My reading of Hockey’s comments on this is that he wants lower rates to do the job, not currency intervention. That’s the right solution too IMO. The Govt as well as the RBA should be focussed on doing what is required to reduce interest rates so that relatively the advantage of holding AUD ( almost zero risk on a IR differential of 3%+) is not so pronounced.

    • Lower rates = more property buying = more foreign funds needed = a higher exchange rate! Until the core problem of the economy is addressed, the exchange rate, which is substantially an expression of the relative need for debt, is likely to remain under upward pressure.

      • Yes – i think Kohler was saying last night that almost every drop of govt debt is held by overseas interests.

        Perhaps if the Fed govt was not pumping out tasty debt securities at a rapid rate for foreign central banks there would be less of a frenzy for australian financial assets simple because they would not be many to buy.

        At one point our govt bond market was a petting zoo kept alive to assist thevpricing of other assets.

      • Lower rates = Lower AUD. Increase deposit rates on Mortgages (or another solution) and your equation is no longer valid as it applies to RE. This is not such a difficult problem to solve.

        The high AUD is substantially a reflection of the Carry Trade. Remove the attraction or at least substantially diminish it and the AUD will come off.

        • “Increase deposit rates on Mortgages”

          Are you advocating a government-mandated minimum deposit on mortgages? The free mar(ac)keteers will be thrilled about that 😉

          Given Australia has full recourse mortgages, our banksters have little incentive to jack up mortgage deposit rates of their own volition. Quite the contrary, in fact.

          • I dont see it as Govt mandated, more RBA mandated under the banner of prudent and sustainable lending practices. It would make speculation a lot less attractive and not lock out genuine buyers.

            Let the Banks squeal. But it would help solve our high AUD problem were the RBA to lower rates.

    • Cognitive Dissonance

      The words reserve currency pushed rates up in the 70’s and then on to the long slide to practically zero now, on the way down it has created bubbles all over the world.
      If we wont to complain about traders doing the logical thing we need to do what we have always done, follow the reserve currency.

      However I would much prefer so see the reserve currencies interest rate to go up to promote less consumption and more savings and more production so that the world can come out of its slump.
      Look what happened in the 70’s the world come out of that recession strongly and what did we have at the time.

    • “..Hockey’s comments on this is that he wants lower rates to do the job..”

      It is noteworthy that another of those “nutter” “mad” “dangerous” “economic illiterate” rural types, Bob Katter, was either (a) ripped to shreds, or (b) ignored as a fruitloop, when he was first to raise exactly this issue some 8 months ago –

      RBA Should Lower Rate Or Be Sacked: Katter

      http://news.smh.com.au/breaking-news-national/rba-should-lower-rate-or-be-sacked-katter-20111217-1ozsp.html

      I am very pleased and heartened that this topic is finally breaking into the public debate, with merits/demerits being discussed by “experts”.

      However, it is also a(nother) classic example of, and sad reflection on, our society’s collective arrogance, propensity to ridicule the concerns of (unfashionable) others, and apparent inability to simply play the ball rather than the man.

        • Just to clarify, I personally do not support Katter’s preferred method for trying to weaken the AUD via ZIRP. As mentioned here once or twice, I’ve long advocated following the Swiss & Chinese with a currency peg.

          My simple point here was, Katter had identified the far-reaching consequences of the AUD fx-rate and was calling for action long ago. In large part simply because he is Bob Katter, he was ignored/vilified, and the substance of the issue dismissed. Lo and behold, 8+ months later, the “experts” begin to wake up to the issue, and it begins to be debated on merit, not dismissed out of hand as the populist rantings of a country redneck.

          Katter was right (broadly speaking). And importantly, way ahead of the likes of McKibben, Minack, and (per Business Spectator yesterday) Stephen Koukoulas.

      • And you did leave out some other details.

        “Mum and dad investors wouldn’t be hit for six as a result, Mr Katter said, because KAP planned to invest billions in ethanol production and a power transmission line across northern Australia.

        People could invest in these government-backed projects and receive guaranteed returns better than those currently offered by the banks, he said.”

    • Diogenes the CynicMEMBER

      Interest rates is one lever but it has consequences for the property market which needs/wants to deflate as our land is too expensive currently. It also hurts the savers out there and they are a growing group.

      Sovereign wealth fund, some sort of transaction tax to reduce fickle short term capital flows, perhaps lower interest rates combined with removing tax advantages for property like negative gearing and CGT free on homes. I hate giving subsidies to loser industries like autos but if they were better targeted ie to making products that the populace actually want or might need in the future…

      • The “saving” demographic in our country had free health, free tertiary education, compulsory superannuation with associated tax breaks and a huge free kick from a property boom.

        Why do these people now feel like they are owed a living by maintaining high deposit rates ?

        These “savers” en mass have mostly ignored a government bond market that has returned double digit returns over the last few years whilst they sit in floating rates.

        If people can not find anything more productive to do with their capital than stick it in the bank then that is their problem. The inter-generational wealth transfers which are occurring in this country will have more profound implications than most people expect.

        • Of course. It was all handed to them on a platter.

          One could equally say that the grey haired brigade actually worked and sacraficed for all they have managed to accumulate over the decades.

          The youngsters have yet to or are doing those yards themselves. So what is with the whining?

          Pitching this issue as a “generational” debate reflects the entightlement attitude at it’s most acute.

          • @GSM – no whining from me at all, I am stating a few facts and giving my opinion.

            Free tertiary education etc is just a fact, I am not bemoaning it.

            Seeing as you saw fit to comment on my opinion with a largely subjective response about how people “sacraficed” to partake in a 30 year bull market in asset growth why don’t you attempt to answer my question ?

            Why are savers owed a living ?

          • williros,

            “Why are savers owed a living ?”

            Because these are the people who are responsible and build for the future. At present sadly, worldwide, its is a trend that the greedy and irresponsible are being given a living at the expense of the responsible.

            Anyhow, re interest rates, my understanding is that even in the early 80’s with double digit interest rates, it was easier to pay off a ‘average’ mortgage than now, simply due to sensible asset prices. Perhaps the problem is that interest rates are not ‘the’ problem?

    • What bloody voices. McKibbin + MB is it.

      Your solution risks a credit surge. That is exactly why we should not cut rates targeting the dollar. That way it will increase money supply.

      The whole point of Mckibbin approach is that it doesn’t. It enables you to lower the dollar without impacting the domestic economy in other ways. It can simply be reversed later when the dollar falls no harm done.

      In the mean time, if you don’t do it, you’re giving up your production instead of handing over some easily printed paper. That’s why the whole world is doing it. That’s why I’m in favour it.

      Because it makes bloody sense.

      • HnH,
        There will be impacts on the local economy with a lower AUD, like it or not. The nett effect however will benefit the economy – local manufacturers, exporters (cost base) and service industries.

        Imports, fuel etc, all will rise in nominal costs.

        There are ways of managing excessive credit flows. I don’t favour McKibbin’s option is it is manipulative and arbitary bringing into the picture vested interests: At what level is intervention to begin? What size the intervention?What AUD level is acceptable? Who decides these things? It will become a political nightmare which I’m sure the RBA would rather avoid.

        No, sorry. I don’t believe it (ALL) makes sense. You don’t think McKibbin is being a little erratic on this issue? His messages at times seem a little contradictory.

        • McKibbin himself makes many of those points.

          The vested interests question is far less vexed with a temporary and well directed currency intervention aimed at portfolio flows than it is if you leave it to FIRB and arbitrary bailouts, which is what we have now.

          Of course, the intervention boosts tradeables, that’s the whole point. To that extent it will influence monetary policy higher. And? It won’t be that much and I’d much rather have that than more credit from lowering the cash rate.

          • On one thing we agree. The AUD is far too high. So, out of all of this debate I hope they DO SOMETHING about it, and quick.

          • Rumplestatskin

            How about lower interest rates coupled with stricter lending rules for property? Might take the froth off the AUD and encourage some business lending and investment.

          • “stricter lending rules”

            Per my comment above, would that not require government intervention, since (due full recourse lending) the banks’ business model has a fundamental disincentive to raising deposit rates / tightening lending standards of their own volition?

  8. While we are debating exotic options why not start with something simple.

    Limit the sale of new govt securities to locals – particularly retail investors.

    As locals will not need to rush out and acquire some local currency this should not put pressure on the exchange rate.

    There may be other financial assets we can put out of reach of those fleeing international money printing.

    Of course this conflicts with the national past time of outsourcing the habit of saving to the developing world.

    • Why not just reduce the public debt as fast as possible? If commonwealth debt is reduced, either foreign investors buy Australian private sector bonds as a riskier substitute or they withdraw their funds from the country and hence sell their AUDs which puts downward pressure on the currency.

      This is a the simplest solution since it does no involve any restrictions on foreign investment and continues to promote Australia as a destination for foreign investment.

    • GunnamattaMEMBER

      Exactly! This is why it is a nonsense to argue that we should not do something about the value of the dollar because that would imply politics in the monetary policy. At the moment we have the politics of basically every other nation (or those buying into AUD denominated debt) already in our monetary policy.

    • It will be interesting to see how fast the AUD goes backwards when it becomes obvious the mining boom is over in a couple of years. My guess is a a negative feedback effect precipitating a panic flight from a huge number of carry trades. In short (to use the operative word) it will drop like a stone.

      • GunnamattaMEMBER

        and just imagine if you will the way it may be impacted if markets look at Australian politics and see an incumbent government barely avoiding being tarred and feathered, and a near cert opposition basically playing an open misere hand on fiscal austerity……..after 18 months or so of policy inaction.

  9. Using interest rates is probably more appropriate, for the reasons discussed above, but also because higher than expected AUD will tend to keep a lid on tradeable inflation for longer than the RBA might have expected when reducing rates earlier this year.

    If the RBA were to intervene directly in FX markets, there’s an open question as to how effective this would be (http://www.rba.gov.au/publications/bulletin/2011/dec/7.html), and another problem: which foreign currency assets would they buy, and would this be sensible given the super-low yields on offer at the moment, and the heightened default risks in some currencies?

  10. Garry Shilson-Josling

    I’m not sure which local economists say this is the “first time the RBA has so implied the dollar is high, or somewhat stretched, relative to trade fundamentals”.

    The RBA has been mentioning this sporadically for months now, eg from Glenn Stevens’ testimony to parliament on Feb 24, nearly 6 months ago:

    “We do continue to ask ourselves whether what is happening in the currency makes sense. I would observe that the most recent bout of strength is happening at a time when the terms of trade have actually peaked and have started to come down. That is a bit odd, but we will see what happens.”

      • Stevens seems to serve a different master than the Australian people.
        We are seeing corruption in banking all over the world.
        I see Stevens as a corrupt Bankster that is not acting for the people, but
        for some hidden interests that are profiting from an illogical stance on rates and a high $A.

  11. @williros,

    Not that I havent already answered your question;

    “Why are savers owed a living ?”

    I am advocating lowering interest rates . It’s up there for all to see.

    It was a whine right enough.

  12. why can’t we just do nothing?

    let the market work it out?

    stop trying to control everything.

    – let the market dictate the AUD

    – let the local economy react to the AUD through export weakness

    – then let the AUD fall on economic weakness

    like it’s supposed to.