From serial system-hugger Victoria Thieberger today:
The Aussie dollar smashed through US74c to an eight-month high on Friday night, still on a high from figures showing economic growth that is the envy of the OECD.
But global forces are complicating the picture for the Reserve Bank and limiting its ability to respond to an elevated currency that could wreck the recovery.
One thing was clear in last week’s GDP report that showed annual growth of 3 per cent, substantially beating forecasts of 2.5 per cent: the Aussie dollar has been playing a key role in lifting trade-exposed areas of the economy.
The fall in the Australian dollar is a huge help for manufacturing, tourism, education, farming and mining…Yet paradoxically, if the currency rises much further — and it is already closing in on US75c after breaking through key technical levels — there is a risk it will act as a dampener on those same sustaining sectors of growth.
The RBA believes further economic stimulus should come via government infrastructure spending and the currency. While there may be some movement on the public infrastructure side, the Aussie dollar is no longer conforming to the RBA’s wishes.
In the face of global currency wars triggered by other central banks moving towards easier policy, the RBA has little option but to leave rates where they are.
How can you write this article without once mentioning housing, rendering the analysis completely useless. The RBA is simply lying in the currency bed it made for itself by blowing a gigantic housing bubble to hide its total misread of the duration of the mining boom. Of course the RBA could lower the currency. All it needs to do is the same thing that it has already done but more of it:
- get on the phone to APRA and tighten macroprudential again;
- cut interest rates to 1%.
The dollar would immediately begin to fall again. Spread the US show it clearly:
With rates at 1% we’d be back into the yield spread range at the turn of the millennium when the dollar traded in the high 40s and 50s.
It’s the RBA that’s holding up the dollar pure and simple via its bubble-management strategy.
Thankfully, the currency falls will come again anyway as the terms of trade continue to revert to mean but much more slowly than it should and with far more risk in our current mad surge in offshore debt growth (the fastest in history) than the nation ever needed to take on.
