McKibbin urges RBA to force down Australian dollar

By David Llewellyn-Smith

Thank heavens. Australia’s best free-thinking economist, Warwick McKibbin, has finally broken the Canberra consensus and urged the RBA to sell the dollar. From the AFR:

Former Reserve Bank of Australia board member Warwick McKibbin is urging the central bank to intervene in currency markets to limit the strength of the dollar, suggesting that ‘safe haven’ demand from foreign central banks is artificially driving it higher even as commodity export prices fall.

…An intervention by the Reserve Bank could create the perception Australia was joining the global “currency wars”.

…“The logic is that foreigners want to hold more of our currency – they’re not wanting to buy more of our goods, they want to just hold more of our currency,” Professor McKibbin told The Australian Financial Review.

“So the optimal response is just to supply them with more of our currency and not to let that affect the economy. If you don’t supply them with more currency, then they will still buy more which will drive up exchange rates and then that will be changing relative prices in the Australian economy, which you don’t want to change.”

Professor McKibbin said the disconnect between falling commodity prices and a rising Australian dollar suggested the weight of central bank buying was playing a role in propping up the currency.

Here is the disconnect, pure and simple, iron ore going one way, the Australian dollar the other:

Kudos to Mckibbin and about bloody time for everyone else. And a quick point. Can you name a single nation – just one – that is not already neck deep in the “global currency war”? Go ahead, name one.

In the article, Saul Eslake and Paul Bloxham chime in to object to the idea of intervention on the grounds that the RBA would be seeing itself as a better judge of the value of the dollar than markets. A dangerous idea!. Fair enough, nice to have a few cautious voices around. It would be better if they had an argument beyond the discredited efficient market hypothesis but hey.

Now, ignore them and get on with it.

Comments

  1. So Australia sucks away the QE that, say Europe, provides that is supposed to go into stimulating their domestic economies? And what when ‘they’ want the money back? Does the A$ then get over-hammered down as the funds gush out? Whilst I sympathise with the dilemma, I’m not sure ‘printing’ is the way for Australia to go.

      • And that’s it in a nutshell! The free market and price discovery mechanisms are fine, until, they hurt ‘you’. Then, a little market intervention here; a little tax there. All designed to support/protect ones own economy. Perhaps this is the day for you to pen your free market/trade piece.

        • Come on, Janet. The dollar is being forced up by intervention everywhere. The premise of your critique is false. Right now there is no intervention-free price for the dollar. Pretending otherwise is idealistic suicide.

          • And isn’t that the problem? In any multi faceted system, be it currencies or trade, unless everyone plays by the same rules, and adheres to them, then those that ‘do the right thing’ (arguably, Australia with its dollar at the moment?) then those that do, will be penalised. You’d’ remember that scene from ‘Mars Attacks!” where after uttering ‘We come in peace’ the assembled dignitaries are obliterated by the Martians. As I say, I sympathise with McKibbin’s views, but is being part of the problem, part of the solution? I don’t take that view.

          • Fair enough and I agree in principle. But it’s realpolitik. You don’t do it, you’re production departs and the world then piles in to profit from your demise. Not nice or principled but true.

          • And that, David, is why in my opinion free trade won’t work in the short or longer term. And because trade won’t be free, neither will currencies. The ideology and social objectives of such divergent global political systems won’t harmonise. You are far closer to the game than I, so I shall just keep reading MB and see if my opinions change.(NB: NZ has a FT Agreement with China, for instance, and it’s going to cause all sorts of problems)

          • Are we saying if the world had only one govt, one currency, one set of rules, it would solve the problem?

          • Well by definition we wouldn’t then have to worry about the value of the AUD.

            Not to say that there wouldn’t be any other problems. 😉

  2. Getting ridiculous. Swiss are buying euros then madly offloading to other currencies (including aud) – so off we go for the reverse.

    Norman M is going to get more and more quoted, even after the next two weeks.

  3. A reasonable alternative to trying to do it with low rates.

    On the demand side some controls on foreign investment might be useful. By that i dont mean limiting investment in everything, just some things like govt bonds and assets of strategic significance.

    No harm in placing lmits on our dependence on the saving habit of foreigners.

    PS. The ideal investment for foreigners is unproductive housing and office buildings – and infrastructure. Lets use our savings for things that generate more lasting returns like small business, training and R&D.

    • Yes. Any pretence that other currencies aren’t manipulated is long past – we should be using all the tools at our disposal.

      And getting offshore funding for infrastructure & R&D seems like a good idea. Along with policies aimed at stopping the money ending up in resid property.

      Sounds like Zurich is in the middle of a horror resid property boom.

  4. Jumping jack flash

    I was always behind a strong dollar and adjust labour competitiveness accordingly, but if the high dollar is killing manufacturing because Australians want to see lots of numbers on their paycheques every week for absolutely no good reason, and we feel comfortable with our high cost of living, then the obvious choice is to join the messy currency trashing party.

    But really, why have $1000 on your paycheque if a paycheque of $20 would still mean you can buy almost as much stuff if we didn’t have the inflation that having a $1000 paycheque causes? It is just a useless psychological effect in the end.

    • StanGoodvibesMEMBER

      um because that $1000 on your paycheque means you can still afford that $800,000 McMansion in the burbs?

  5. Rumplestatskin

    My gut feeling is that his suggestion is a bit late. The RBA has made it clear that currency intervention is a last resort, and they demonstrated their commitment by no intervening when the AUD was about $USD1.10

    You need to go early and reaffirm a strong commitment, otherwise international investors won’t take it seriously.

    • Has any CB been successful at currency intervention? I’m thinking the BoJ, and SNB as examples. How would we go pegging like the SNB as they did a while back?

      • Rumplestatskin

        The SNB still has the CHF pegged. China still pegs. What’ your BoJ example about? They had a cheap Yen in the 1980, but the US politically pressured them to allow it to rise against the USD to help US manufactures (Plaza Accord).

        • That was my point – do you think the RBA would peg? On the BoJ didn’t they do lots of USD buying to see it evaporate. I didn’t know what it was called.

          What do you think the RBA can do policy wise?

        • I don’t know the technical side of the policy debate, but I know in Brazil they are have put CB policy in place, but is it working for or against them?

          I know a foreign investor in northern Brazil and all his funds had to go via the Brazil CB. They have also clamped down on foreign resident status since he moved there last year.

          I’d just like to see a list of the policy options and see them debated.

    • Being late isn’t an excuse for not trying though. When we hit $1.10 the conditions were quite different.
      The $AUD is going into a bubble and that will hurt us all in the end.

      • But yesterday you said that a drop in the AUD would be a welcome stabiliser and thus get house prices moving up again?

        “But a sharp fall in commodity prices would precipitate a sharp fall in the dollar which would assist all of the non-mining industries (as well as mining revenue in $AUD)and it would start to make our real estate look cheaper on international comparisons.”

        • TP – read that again – I didn’t say it would get house prices going up again, I said that they would be more competitively priced on an international comparison. Maybe a few extra immigrants immediately buying house would help, but it would be very marginal.

          I think that if we want quality immigrants who intend to stay here and assimilate, then buying a house here is a good start to embedding them into our society. Currently the high $AUD makes that very hard for them, and their own store of wealth is diminished when they transfer their savings here.

          Perhaps I’m wrong but I see that as deterring those who have substance who would like to come here but don’t want their wealth discounted heavily in the process, whilst it isn’t a deterral for those who have nothing. Zero savings at a 30% discount is still zero.

          So perhaps we get a lower quality intake as a result.

          I don’t think I’m being excessively discriminatory to suggest that we want the best people possible – people who add wealth and skills to what we already have.

          • How about trying to keep our own high quality members of society? You know the ones who’ve been born, bred and educated here at great taxpayer expense. I’m seeing far too many of these disappear O/S for a litany of reasons, not the least being the cost of shelter you’re harping on about. We don’t seem to talk about them. Is the other alternative more politically correct?

          • Jimbo that’s a different argument. I was just replying to TP.
            If people want to work overseas then there is little that we can do. I have family who did exactly that, and now after 5 years they are back bringing work experience back to this country that couldn’t be found here.
            As for housing, they already owned a house and are now buying another dwelling in CBD Brisbane for about 1.5 times household income, or 2.5 times main breadwinners income.

          • Forrest GumpMEMBER

            Peter, I would have thought that a foreign owner of an Australian property would want to quickly offload their property before the AUD$ was to fall. We need to remember that a foreign investor doesn’t pay capital gains tax on the ForEX difference, just the difference on gain in capital value. I would think that a smart foreign investor would cash in on property before the AUD drops and reap the tax free benefits of the ForEx? Considering it may take some time before a real capital gain is realised…sometime in the future…What do you think?

  6. Cognitive Dissonance

    The times are tough now, just getting tougher
    This old world is rough, it’s just getting rougher
    Cover me, come on baby, cover me
    Well I’m looking for a lover who will come on in and cover me

  7. Mckibbin seems confused and doesn’t seem to understand or mention anywhere in his piece, the relationship between relative interest rates and the AUD. The other week he was calling for higher IR’s! So, he wants high IR’s while inflation is falling? but also wants a lower AUD? I’m glad this guy is gone, his ideas sound quite dangerous. The AUD is high becuase currency traders are rightly taking advantage of the RBA’s misreading of the economy which is causing a mispricing of the AUD. The currency market is working fine and doesn’t need intervention. Its the RBA that needs intervention. If they stop talking up the economy and start making statements and monatery policy decisions based on reality instead of their hopelessly wrong forcasts the AUD will fall back to where it should be.

    • +1 GB.

      The AUD- JY/US/EUR carry trade is alive and well.

      With the Plaza Accord in ’85 a real exch rate reconfiguration occurred because of coordinated sustained intervention by the big CB’s – BOJ, Fed, BoE, Bundesbank etc

      Until the RBA gets IR’s down it’s hard to see how any meaningful and sustained drop in the AUD can take place. I’m sure McKibbon knows all of that too so interesting he pens this article.

      • If we also have an objective to limit our dependence on the savings habits of foreigners – limit reliance on wholesale funds from OS – then the RBA will have limited ability to force rates down.

        As we know too well Aussies require a fair bit of interest rate stimulation to maintain any substantive saving habit.

        Limiting the investment options for foreigners, or allowing them to accumulate zeroes in bank accounts by printing and withdrawing as required might be more effective in reducing demand for our currency than distorting interest rates.

        Having said that can we keep the currency high until everyone has a nice big telly.

  8. I believe a cross currency and commodity adjustment factor that is randomised so the RBA always wins would do it without selling any dollars. Other central banks would go whoa and stop buying. I believe the Brazilians have something like this.

  9. Could be a chance for the RBA to make some extra profits. They might need the extra foreign currency to defend the AUD later.

  10. “…An intervention by the Reserve Bank could create the perception Australia was joining the global “currency wars”

    No Swanny, Glenn, Julia and the rest of the idiot politicians are to busy bragging about it and how strong the economy is which is BS.

  11. Good on McKibbin for drawing attention to the widening disconnect between commodity prices and the AUD. I know MB has been screaming it from the rooftops for weeks now, but McKibbin brings some gravitas to the issue.

    What’s most concerning is the RBA seems to be losing all control over the exchange rate. With CBs piling into the AUD as a “safe haven” (only to run like hell when TSHTF) lowering rates and/or direct intervention in the currency markets won’t have any impact. The RBA simply doesn’t have the firepower.

    Oh, and Bloxham would see no problem with the dollar at $2.50. If the market determines that is the correct value for the currency, then it must be correct.

    Bloxham has never seen a recession in his adult life, so he’s never seen the consequences of irrational valuations during a boom. Seriously, all these cheerleaders for the dollar should be made to spend a month working for a manufacturer or some other trade exposed business. Kinda like a Go Back To Where You Came From for bullhawks.

  12. At last, someone has introduced some reality to the currency debate.

    Eslake is wrong on this one. All the rules change when the world interest rate is stuck at 0%, because the 0% zone is forced into manipulating long-term rates lower (stealth depreciation). The exchange rate doesn’t perform the same function it did during normal times.

    Treasury in particular hasn’t accepted this; instead they have pretended that the currency has been driven by the ToT. It hasn’t – now it is becoming obvious. It would be reckless for the RBA not to consider intervention.

  13. StanGoodvibesMEMBER

    Oh come on, it’s not ALL bad. Us Kiwis working over here are having a cracking time paying off NZ mortgages….

        • It’s what mcKibbon sort of insinuates.

          If they want our currency, print plenty off it and exchange it for their real assets.

          I mean if we were ever going to buy up the world, now is the time. Perhaps using it to pay off our excessively large mortgages may have something to do with it.

        • Yes. Isn’t one of the major (the only?) benefits of having a strong currency that you get more in return for sending the same amount of money overseas?

  14. “It would be reckless for the RBA not to consider intervention.”

    You’re effectively saying that because ZIRP is distorting financial markets elsewhere, we should distort ours too. The main reason foreign parties wish to hold the AUD is because we are pursuing a sound-money policy. Were this to change – that is, we were perceived to be willing to debase the currency – the exchange rate would drop like a stone. We would not be adapting to a high exchange rate, but a weak one. Considering the impact this would have on inflation and our foreign debt, we would soon be wishing for a high exchange rate once again.

    We have to accept that global markets dislocated and relative values are distorted. It does not follow that, of our own volition, we should set out to distort things even more.

    • That’s not what I’m saying. For simplicity, split up the global economy between “Australia” and “The World”. When the world rate is at 0%, 2 things happen:
      1. The short rate can’t be cut, so “The World” CB has to use expectations and other means to lower long rates. This is partly depreciation by stealth.
      2. Because “The World’s” market clearing rate is below 0%, it’s possible that their CB will be unable to generate a meaningful recovery. The longer their short rate stays at 0%, the longer it will be expected to stay there – so long-term rates will be doubly lower in the 0% zone.

      This is just the reality of having most of the high income world in a mini depression – it has nothing to do with “distorting financial markets”. In my scenario, if Australia didn’t accept this and didn’t try to limit any overvaluation, it would eventually get sucked into the 0% zone as well (whether it wanted to or not).

      Also the foreign debt is effectively in our own currency. It can only be “paid down” with trade surpluses, which a weaker currency would help achieve.

  15. I almost choked on my breakfast reading that.

    McKibbin is a complete and utter laughing stock. One month he’s urging the RBA to lift rates, the next he’s urging AUD intervention.

    He has no credibility left.

  16. The high AUD offers some very distinct advantages that should be measured against the disadvantages. In particular, it is making it easier than would otherwise be the case for us to pay down our foreign debts. While it lasts, this should be thought of as a second windfall gain for our economy. It is facilitating our adjustment away from credit-dependence without provoking stress in banking and the property market.

    The high dollar is not comfortable in some ways, but it is a lot more comfortable than things would be with a weak currency, high import-dependence, high external debts and feeble world growth.

    Really, the worthy professor has missed this one.

    What we need to do is foster high-value-added, science-based, export-oriented industries that are levered around growth in Asia. This is not easy either, but it is better than impoverishing ourselves by pursuing a self-defeating weak dollar policy.

    • How is it making repayments cheaper? They’re largely swapped anyway.

      A high dollar encourages import dependence not discourages it.

      You also seem to think there is only a very high dollar or a very low dollar.

      Intervention can help contain the dollar without blowing it up.

      • Regardless of whether the interest rate and exchange rate risks on existing debts have been swapped, the absolute level of external indebtedness when expressed in AUD terms is lower with a high dollar than a weak dollar. It follows that debt:GDP ratios will be lower and debt service:GDP will be lower. If markets believed that these ratios, which measure credit-worthiness, will deteriorate, then the cost of debt will be pushed up. This would apply to new debts as well as to existing debts as they mature and are rolled forward. We would embed higher borrowing costs for the indefinite future and make debt reduction just that much more difficult to accomplish.

        The single worst ting we could do to our standing as a borrower is to say to our lenders “We will pay you back, but with a currency that we are going to set out to cheapen.”

        In any case, we won’t find it easy to calibrate intervention so finely that we will find the “right” level for the exchange rate, even if we could agree what the rate might be. Australia is not another Switzerland. It is foolhardy to think we might be.

      • The Faux West. Winners in a losers race. Should we buck the masters of the race, watch out!!

        When something breaks, I shall outbid you, and bid you adieu.

        With our currency woes, it’s the divil take the hindmost.

        We ride, and fn ride hard.

  17. Ronin8317MEMBER

    While I agree with the sentiment, it is dangerous for the RBA to openly manipulate the exchange rate. It will create a ‘expectation’ that can become very dangerous later on as the Aussie dollar falls.

    There is a far, far better way to achieve this : buy more gold to counter other central bank’s purchase of AUD. It will not be controversial, it will make the ‘gold bug’ happy, and it has exactly the same effect.

  18. I like McKibbin but this is a case of ‘You can’t have your cake and eat it to’.

    McKibbin needs to clarify his position on both rates and AUD. Out of interest, did he advise an ‘appropriate’ level for the AUD?

    As some as noted above, the strong dollar also brings myriad benefits. Be careful what you wish for.

        • Yes he advocated raising rates, which would’ve presumably lifted the AUD.

          One can also assume he was therefore happy with where the AUD was last month versus the USD, which was around parity. The AUD has moved up about 5% since then – you can’t have central bankers intervening on such small moves. Thankfully he is nowhere near monetary policy.

          The AUD has deserved to trade higher on its own anyway. Strong retail data, trade back to surplus, house prices higher etc etc

      • Doesn’t a “stabiliser” or “shock absorber” work most effectively when it is allowed to move freely both up and down?

        • Well the caveat there is ‘up and down’.

          With other currencies engaged in intervention, up is the only way for the AUD.

      • HnH, who is to say the dollar is NOT now working as an automatic stabilizer? It is not advisable to look for real-time one:one correlations between the AUD and, say, the iron ore swaps market, Newcastle coal, 90-day copper or even 10 year US/AU bond-differentials.

        Many things feed into currency prices, which are very large, enormously liquid and continuous over very long time frames and contract formats.

        At the moment, risk aversion/assumption strategies are impelling demand for AUD financial assets. We know these can change in an instant and that it is just folly to try to second-guess very-high-velocity, very-high-volume capital markets. We know the probability of error in attempting this is very high, implying that it is almost impossible to calibrate exchange rate interventions – in either their timing or their magnitude – so that a target could be hit at all and then sustained at will.

        Appeals for management of the exchange rate to some ideal lower rate are, in their own way, an appeal to wind back the economic clock to the 1990’s or early 2000’s, when things were “easier”. This just cannot be done. The global economy has changed and we must change too. Our attention should be directed to the opportunities that will exist 5-10-20-30 years hence, rather than at those now lost in the past.

        We know – difficult as it is to accept – that trying to manage relative prices using the exchange rate cannot work in the long run. And since it cannot work in the long run, it is not likely to work in the short run either, as the Brazilians are currently finding out.

        We have to move beyond simple-seeming but futile appeals for price manipulation.

  19. Isn’t it all swings and roundabouts? if the AUD goes up, we can buy overseas assets on the cheap or pay off our foreign debt more cheaply. Then if the dollar falls we can sell those assets and reinvest in australia.

  20. As an aside, it is possibly worth thinking of the Prof as unofficial leader of the opposition to the Stevens board. Perhaps he fancies himself as the next Governor and is putting some lipstick on his credentials – now he is both an inflation fighter (raise those rates!) and an industry guru (stop the dollar!) at the same time.

    One thing is becoming clear to me, however. For an economist, he has but a shallow understanding of markets.

  21. HnH – you need consistency from those in charge of monetary policy. Not flip flopping like McKibbin.

    • What is it going to be next month from Warwick? Back to hikes due to all the good data lately?

    • You’re confusing two separate issues. One is about a bubble in safety (as Kohler called it nicely) driving up the dollar. The other is the state of the domestic economy.

      McKibbin’s whole point is that the two have disconnected.

      • I happen to agree with Kohler, but that is not the point at all actually.

        The point is why didn’t McKibbin call the bubble last month then? Certainly strange if he thought the AUD was a bubble last month, whilst simultaneously declaring that the RBA should raise rates, don’t you think?

        AUD has not gone from fair value to bubble in one month.

      • Have you looked at a long term chart of the AUD against the majors lately? GBP/JPY/EUR/CNY And then there’s KRW/CHF/NZD/HKD etc etc

        Maybe not bubble against all (hard to define until after it pops as always), but extremely overbought.

  22. In theory this is the time to be buying quality overseas assets and hopefully reduce our CAD when the swings and roundabouts come around again.

    Buying food manufacturers and commodities traders as a possible theme ?

  23. I hope the RBA have DEEEEP pockets to oppose the EUR/USD/JPY side of the trade.

    “…Mummy, the waves keep washing over my sand castle. I’m going to create a barrier with our three popsticks…”

  24. I disagree completely with McKibben on this.

    Besides the fact that currency intervention never works. What exactly will devaluing the AUD by a few cents achieve? Maybe our car industry shrinks at a slower pace or manufacturers move production overseas at a slower rate but overall it just delays what should happen now.

    When foreign investors buy AUD they have to invest in something or inflation will just erode their purchasing power. They will either buy bonds or equity that will lower the cost of capital for businesses or government.

    There’s also the added benefit of our imports become cheaper (remember that almost everything we consume is made overseas) and everyone benefit from this effect.

  25. HnH, forgive my ignorance. If we owe mucho offshore in other currency/derivatives/obligations, would it not be prudent to maximise your currency value to engage in swaps, etc. to reduce your offshore obligations, in favour of onshore/local obligations?

    I.e. Buy back with a high currency?

    Or are we at the head of a Mestipheleon pack of running cannibals, where your are nominated head of the pack, and should you fall…..