The RBA’s broken jawbone

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.

 

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Comments

  1. “… simply talk down the dollar…” Buy the rumour/sell the fact. Neither jaw-boning nor interest rates cuts are likely to affect the value of the A$ lower. Talk is cheap, and the lower interest rates go, the more certain it is they will then rise. In both cases – buy. Only branch and root reform of the Australia financial economy will recalibrate the A$; to whatever rate that might be

      • “Bernanke to the rescue” another MB piece notes. Yes, jaw-boning with action…and guess where much of that QE is going to end up?! And do the rest of us risk a currency, then a trade, war by countering with our own version of QE? I doubt it very much….Australia’s role is to suck it up, and do as they are told….

  2. Hmm, it is doubtful that the jaw bones has any teeth.

    A good gumming is about it.

    The idea that the RBA will go Swiss style is fanciful simply because they like the dollar high for their low interest rate strategy.

    The low interest rate strategy in turn is driven by a desire to give room for Mr Swan to be Austere-ish in an election year and because the RBA remain huge fans of a debt driven economy and platypus spotting.

    The RBA are much more likely to get twitchy if the dollar falls as that may put ZIRP ambitions on the shelf.

    Of course the sensible approach is raise interest rates, limit foreign ability to buy $AUS assets and use fiscal policy (by debt to locals or by printing) to soften the transition.

    Yes, i know we differ on this and you feel the result of this prescription would be a horde of fleshing bats descending from the belfries of the nation. 🙂

  3. I reckon, all things considered, RBA have decided the AUD is of more immediate benefit stronger than weaker.

    They’d have a lot more to deal with if/when it tanks.

    • Go long Safe manufacturing and Security Box company share! Negative interest rates can’t work, because people/banks will just hold the cash at the minimum return of 0% rather than pay a bank to store it for them.

  4. More talk….”The Reserve Bank ( of New Zealand) is considering restricting the amount of money banks can lend for home mortgages, and it has the government’s support….Finance Minister Bill English says…”There are some expectations that these tools will be used immediately to dampen the Auckland housing market,” More jawboning…..it will come to nought, becasue an election looms….as it always does!
    http://nz.finance.yahoo.com/news/bank-moves-restrict-lending-000003970.html

  5. “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…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…”

    = housing and resources dominates policy. We have tied our colours to these masts. For everyone else, too bad.

    • Resources sector as such doesn’t dominate policy, not anywhere near the degree that myriad interests associated with housing (very important sector) do.

      It is simply that in global/trade terms the resources sector contains the capacity to be a major positive for the nation. Take it away and we are like any other non-resource middling economy.

  6. A lot of travelling, imported car and appliance buying, petrol and diesel and food buying members of the public will be p1553d off if the AUD falls.