Crikey has a story today bashing Tony Abbott on the dollar. It begins with a quote from the PM:
“I am pleased to say that what goes up can come down, and the floating dollar is now down to about 90c, a level which makes it much easier for our manufacturers and for our exporters. I support the floating dollar just as, it seems, the member for Kennedy supported the floating dollar, at least when it was low in the mid-1990s. Just as well that the Reserve Bank has been, in effect, recapitalised to the tune of $8 billion because that enables the Reserve Bank to intervene prudently and appropriately in the market to try to ensure that the Australian dollar is at the best possible level.”
…On Friday, Abbott followed up those comments with slightly different ones, saying that the market should determine the value of the dollar but “that doesn’t mean the Reserve Bank shouldn’t from time to time prudently involve itself in the market to encourage what it thinks is the right market developments”. So, strictly speaking, Abbott doesn’t believe the market should always set the value of the dollar — he thinks the RBA should sometimes step in to “encourage the right market developments”.
Despite the Prime Minister’s comments, the RBA actually is doing little at the moment — it is not, to the best of our knowledge intervening to drive the dollar’s value lower by selling the dollar for US dollars or any other currency. Senior officials are trying to talk it down by publicly commenting on the value, how it is too high — and in the case of Stevens, pointing out how the bank can intervene if it has to, to try and force the currency lower. But on the basis of data from the bank and comments by Stevens and his deputy, Phil Lowe, the bank has been talking, not doing.
…But the odd thing about Abbott’s remarks linking the $9 billion to pressure on the dollar is that there is no link. In contrast to the urgency portrayed by Hockey, the RBA hasn’t received the funding yet — as Treasury’s briefing on the issue to then-treasurer Wayne Swan earlier this year noted, there is no mechanism for the government to simply hand $9 billion to the RBA, so it will require a parliamentary appropriation. The RBA will in turn use the funding to buy foreign currencies, mainly the US dollar, because it aims to hold just over half of its assets in foreign currencies.
The $9 billion in fact has no bearing on whether the bank can intervene against the strength of the dollar — for one thing, it’s nowhere near enough to make a big difference. And pushing the dollar down will actually increase the value of the bank’s foreign currency holdings, rather than deplete its assets as Abbott appeared to suggest. It seems that Abbott doesn’t have a basic grasp of why exactly he’s blowing a $9 billion hole in his own deficit (no matter how much he might insist it’s Labor’s deficit).
I don’t doubt that the Prime minister is making political hay from the dollar’s fall, and claiming credit is cheeky in the sense that it may compromise the RBA’s integrity. But at least he has had the brains to help the RBA talk the currency down after years of Labor clap trap doing the opposite.
Whether Abbott is right for the wrong reasons, the move to recapitalise the RBA can and probably is affecting markets.
The money may not typically be used for a currency intervention but these are not remotely typical times (and this is where the entrenched optimism of Bernard Keane and Glenn Dyer comes undone again).
Having a nine billion dollar cannon at the central bank’s disposal, whether it’s there right now or will be shortly, is affecting currency traders. I’ve spoken with one recently who said that if the RBA were to wade into options markets with that kind of dough, they could squeeze futures any which way they liked and cause all measure of pain for carry traders. He was afraid of the cash which is the whole point of a jawboning strategy.
Right now, all sorts of central banks are using various forms of jawboning to influence markets, whether it’s the Fed’s forward guidance or the RBA’s talking down the dollar, so it should be no surprise that a few props can help.
It’s probably the case that the Abbott Government is giving the RBA the cash for it’s own purposes but that doesn’t mean that the Crikey duo have a basic grasp of the smoke they’re blowing.
