Cross posted from www.globalfx.com.au
The Australian Dollar made a high at 1.0525 last night and with the Fiscal Cliff avoided, stock markets ebullient, commodities independently strong even with the overnight US dollar strength and Chinese and US PMI’s signalling an economic recovery there seems to be little headwinds to an Aussie dollar that can trade even higher in the months ahead.
Clearly the Australian dollar and its strength are having an adverse impact on the economic outcomes for Australia as the mining investment boom slows, as the terms of trades reverses a little from its recent highs and as Australian Households continue to guard their pocket books and spending with the aplomb of a crack SAS squad.
However as we wrote back in December – The RBA appears happy with a high Australian dollar. Now as the AFR wrote yesterday that is not to discount the fact that the “Dollar will trouble RBA”. The article looks at the enduring demand for Aussie Dollars by Sovereign wealth managers and Central Bank reserve managers noting that,
National Australia Bank global co-head of foreign exchange strategy Ray Attrill estimated that the Australian dollar accounted for 2.25 per cent of global foreign exchange reserves in the September quarter, and central bank demand in the order of $13?billion. “This means that demand for Australian and Canadian dollars by reserve managers rose beyond what would have been associated with pure reserves rebalancing needs,”
That is true and we continue to believe that the Aussie Dollar is going to be stronger for longer – Global FX markets are essentially least ugly contests and Australia, for all the ills that those of here at home continue to see, stands out to global investors as a safe harbour in troubled times.
Australia has:
- A Triple A rating which is crucially untroubled at the moment by debt, fiscal position or growth
- Relatively high cash and 2 year interest rates
- Relatively strong economic growth
- Relatively low inflation
- Still high commodity prices and terms of trade – even if they are off their highs
- A biggest trading partner (China) which appears to have avoided a hard landing
- All of which mean the positive feedback of positive sentiment toward it from investors both small and big
That doesn’t mean that the Australian Dollar is going to head to the moon but what it does mean is that the likelihood of a material Aussie Dollar fall without some kind of domestic or international catastrophe appears low.
So of course the chances are then that at some point the Aussie makes a further topside probe into the mid 1.0850 or back toward the highs of 2011 (not a forecast) at 1.10/11.
As Andrew Salter of ANZ FX Strategy said in the AFR piece a move here or onto 1.15,
Absent an improvement in Australian domestic fundamentals or commodity prices themselves, I think that would constitute a stronger case for the RBA to take a more active role on the exchange rate,” he said. “I think when I say ‘active’ I mean a greater pace of reserve accumulation relative to what we saw in August through to October.”
Remember that the RBA accumulated more than $1.2 billion in Foreign Reserves by not sterilising (that is buying back) Aussie Dollars that it had sold to “other” Central Banks and Sovereigns. In November however it only accumulated just over $100 million.
This accumulation of Foreign reserves is entirely appropriate if the RBA thinks the Aussie Dollar is higher than it should be and it has the opportunity to build up its own asset position without putting further upward pressure on the dollar.
But will it go further than this “tacit” intervention and take the next step to outright selling of the Aussie Dollar?
This history of the float since December 1983 is important to note in this regard. While the Aussie’s history has been one replete with falls and crashes where the RBA has needed to come to the “battlers” rescue it has generally only intervened and intervened in size when the market has become dysfunctional.
I remember sitting next to an RBA operative at a CBA dinner back in the 1990’s when the AUD was being slammed and he upped sticks and said he had to tend to a sick child. That was a big night of intervention but it wasn’t a line in the sand it was to add liquidity to the market to stop a free fall. Equally back in the early 2000’s around 10am one morning the liquidity evaporated from the market and the bids disappeared and the RBA rode in on its horse.
These are but two examples of RBA intervention across almost 30 years of a free floating currency but they are indicative of their modus operandi.
But trying to slow selling pressure is very different to trying to stem buying pressure. The RBA, or any central bank as we saw in the Asian crisis, only has so much foreign reserves that it can sell in order to hold its currency up and stop it falling. But in theory it has unlimited amounts of its own currency that it can sell to the market if it so wishes.
Like the Swiss Naotional bank the RBA could stand in the market selling the Aussie to any and all comers – for a time at least. But unlike the SNB there appears little political appetite on either side of the political spectrum for a line in the sand style Swiss policy and there also appears a lack of intellectual appetite if the RBA’s utterances are to be believed.
So will the RBA intervene?
Tacitly as Andrew Salter of ANZ alluded to – absolutely.
But the RBA is unlikely to draw a line in the sand unless we have a policy debate here in Australia and the Government would support such a move. The preconditions for this are not yet there but a sustained period above 1.10 should it come might change things.
For now then the market is free to push the Aussie Dollar where it will.