Stop helping the RBA play dead on the dollar

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Alan Kohler covers the right subject today but misses a huge opportunity:

In essence the desperate fight against deflation in the United States, Europe and Japan as well as China’s incredible infrastructure spending, and now the expectation of reform there, are combining to keep Australia’s currency high.

As a result, Australia’s currency is now the best performing in the western world.

…Meanwhile the Chinese leadership went into yesterday’s Third Plenary meeting with expectations of a new wave of reform running high, with predictions from Politburo members of “unprecedented” policy changes.

If that happens it will put further upward pressure on the Australian dollar, as a proxy for the Chinese economy.

And all the Reserve Bank can do about this is talk about the problem and cut interest rates, which is only inflating the property market.

Two points. First the Plenum will put upwards pressure on the dollar if reform is seen to slow. Real reform that pushes China away from investment led growth will be bad for Australia and will hit the dollar.

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Second and most important, the RBA is not helpless on the dollar. It can absolutely lower the currency through policy innovation. It would not even need to print money as some have suggested. If it embraced macroprudential tools to control credit distribution and slashed interest rates it would smash the currency without killing the wider economy.

A long list of very high powered people have recommended just this, including the IMF, Ross Garnaut, Bob Gregory, Stephen Koukoulas, Terry McCrann and others. New Zealand and other forward thinking central banks around the world are already doing it.

The RBA and APRA are choosing not to for reasons that are not clear. It is either ideology, institutional paralysis or bureaucratic risk aversion.

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Kohler had a similar lineup of dollar hand-wringers on the ABC’s Inside Business over the weekend. Not once was macroprudential mentioned.

But it can been done and giving the RBA more excuses to play dead helps nobody.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.