RBA won’t get angry at Australian dollar 80 cents, it will get even

See the latest Australian dollar analysis here:

Australian dollar parties as assets melt-up

The RBA has been very explicit about why it has renovated its entire monetary policy framework. Its inflation goals have fallen short for a decade. One major reason why was monetary policy was too tight leading to an overly high Australian dollar. Yesterday at Bloomberg, Westpac’s Sean Callow declared:

“The conversation around the Aussie changes when you leave the 70s. The RBA might be dismayed by the break of 0.80 but given the commodity price backing is so strong, they should take some comfort that the A$ doesn’t seem overvalued. It’s a headwind, but they saw worse in 2011-12.

This is the wrong way to think about it. The RBA will not take comfort from a failed past. An Australian dollar above 80 cents today bears no relation to it doing so in 2011/12.

High commodity prices typically lift Australian activity via three channels: higher wages from investment, lower taxes from bigger budget receipts, and stock market gains. All three were going gangbusters in 2011/12. Only the last is intact now.

The mining investment boom is bust and is not coming back so there is no transmission to wages and demand:

In 2011/12, tax rates were much lower. Today they are rising with further fiscal consolidation ahead. Via Minack and Associates:

The stock market returns are still looking good but the growth over a decade is pretty lousy and it was always the smallest of the three channels:

As well, in 2010/11, the RBA had numerous drivers running in the economy with house prices also hot. Today, that is all that it has. And it has macroprudential policy tools today that it did not have in 2011/12 so it will be very comfortable that it can tighten on that sector without rate hikes if need be.

Finally, in 2011/12, Australia was still hell-bent on selling everything not tied down to a developing China. Today we confront some degree of decoupling from the Chinese economy, including very probably the international student trade which played a key role in delivering growth after 2011/12. 80 cents is the killer point for that sector’s competitiveness:

In short, the RBA will be very unhappy with an Australian dollar above 80 cents regardless of the high terms of trade. The bank has renovated its reaction function for all of the above reasons and it will be triggered if it needs to be. There is still oodles of scope for the RBA to expand QE:

In short, regardless of high terms of trade, the Australian dollar above 80 cents will smash Australian inflation and the RBA won’t get angry with AUD bulls, it will get even.

David Llewellyn-Smith

Comments

  1. pfh007.comMEMBER

    “.. The bank has renovated its reaction function for all of the above reasons and it will be triggered if it needs to be. There is still oodles of scope for the RBA to expand QE:..”

    Well there are all those NBN related govt bonds ($57 billion) it could buy from the market and pump of the deposits of the banking system at the RBA even higher. That will make a huge difference as it will make moaning about the cost of the NBN a bit pointless. The NBN could convert all of the FTTN to FTTP and give the RBA more bonds to buy.

    Then there is an east coast monorail. Let’s build that and the RBA buy up all the bonds issued to pay for it.

    And we are just getting warmed up.

    The government could buy back all those public assets that were sold by issuing bonds and then RBA could just buy them up .
    Yippee.

    Magic money creation and as it pushes down the AUD we can start making cars again!

    I appreciate that destroying the value of the AUD by expanding supply sounds easy and fun but is it really too hard to use our brains and learn from smart countries?

    We could just do something sensible like.

    Accept that high prices for our commodities is a GOOD thing and we just need to be smart about what we do with the proceeds.

    1. Encourage productive domestic investment (not speculation in the prices of existing assets) that expands the productive capacity of the economy. Better freight, communications and transport networks. Better training institutions for raising the skills and education and thus productivity of the work force. The kind of stuff China and other smarter countries have been doing for decades.

    2. Encourage productive offshore investment to encourage capital outflows that put rational downward pressure on the AUD. Like Japan, China and other countries do. Favourable tax treatment of the profits will send capital rushing out the door.

    3. Restrict unproductive and speculative capital inflows – I.e. foreign purchases of local real and financial assets. Like most of our trading partners.

    4. Place a despotism tariff on the imports from countries that exploit labour, do not protect the environment and do not allow freedom of speech and political action. A bit like the freedom tariff China puts on many of our exports.

    5. Allow Australians to operate accounts at the RBA and build savings in public money rather than force them to save in the form of unsecured loans to our bloated, incompetent and corrupt private banks.

    It really isn’t very hard to do better than moronic QE and TFF.

    • Of course this is what we should do. And we should have started taxing mining and resources properly in the 1960s after The Lucky Country came out.

      • Someone ElseMEMBER

        I reckon a sensible speed monorail, based on existing technologies. No one want high speed anyway.

    • Encourage productive domestic investment

      Good luck with that …. put that up in front of any demographic in Australia including preschoolers and they only think about one thing …………. well two if you include The Block

    • buttzilla thirtynine

      well Qantas just got nationalised, ($5B or 25% value). So there’s that…. Commbank next.

        • This was laughable:

          A basic rule of thumb is that when a country’s currency rises in value, it’s a sign “things” — aka the economy — are going well.

          Why do central banks always deliberately devalue their currencies then?!

    • CV
      That’s quite a good article, if DXY breaks down into the 80s, commodity prices will keep rising, and DOW will keep rising, AUD is correlated to DOW
      and US sharemarkets keep rising, that’d push the AUD into the 90s, The 10 year touched 1.72 last night. I do think we may see 10 year come back a little first but definitely inflation is breaking out in the US, Even if it’s not the RBA lifting the cash rate, the banks will most probably raise interest rates. RBA might be forced to hike, even if to take the steam out of the insane bubble in property they have ignited. When I heard RBA say interest rates will stay low for years, i thought what a stupid & irresponsible thing to say, Higher AUD, and interest rates in markets are definitely rising, Housing prices will roll over mid year with decent falls in H2. Central Banks have let this get out of hand, FED will tighten by May June, probably hike 0.25 and definitely give warning to the market they are going to taper back QE. RBA will have to do something or they are creating an even bigger nightmare later this year.

      • “FED will tighten by May June”

        Surely even now Jay “I am not a stampeding elephant 🤞” Powell would be murmuring gentle hints of being responsible and calming to provide some fore-warnings even if it had some potential . Yet at the moment all he does is head a press conference when the market slows. The market seems to be their primary and only goal at the moment.

        • That’s all they have now.
          Keep asset prices inflated so people can get further in debt
          The issue comes when interest rates rise

          • The90kwbeastMEMBER

            Interest rates will only rise if there is the inflation to be bothered raising it. And if there is inflation, then the real debt repayments are reduced anyway. What part of that don’t you understand?

          • “Interest rates will only rise if there is the inflation to be bothered raising it.”
            And they don’t “look through it” as they are already hinting at, to further reduce the debt load.

      • CV

        The guys on the ANZ money market trading desk are worth listening to them, smart guys, I worked with them for 5 years in FX & Money Markets trading, before moving to NY, institutional equities trading = emerging markets

    • David Plank ANZ is correct the market is telling us something, ever since the RBA said interest rates would stay low for ever, the 10 year has gone from 0.65 to 1.70 and 5 year 0.25 to 0.70….. pretty decent increase over a very short period of time.

      And I’d add MB told me all this, MB forecast DXY to 82, they said USD would fall 10%, which I read and thought it was a bit much but looks like the dollar falls will continue for the time being

      Falling dollar is driving a lot of this

      Fed will have to stop the falling dollar at some stage maybe mid 80s by tightening

  2. Its inflation goals have fallen short for a decade.

    That’s because it maliciously excludes everyone’s biggest expense, a house, from inflation.

  3. New Zealand: (Finance Minister Grant) Robertson to require the RBNZ to consider house prices when setting monetary policy and through the way it regulates banks; Seeks more info on DTIs and interest only mortgages …

    Robertson to require the RBNZ to consider house prices when setting monetary policy and through the way it regulates banks; Seeks more info on DTIs and interest only mortgages … Jenee Tibshraeny … Interest Co NZ

    https://www.interest.co.nz/news/109234/robertson-requires-rbnz-consider-house-prices-when-setting-monetary-policy-and-through

    Finance Minister Grant Robertson has decided to change the remit of the Reserve Bank’s (RBNZ) Monetary Policy Committee, requiring it to “take into account government policy relating to more sustainable house prices”. … read more via hyperlink above …
    .
    .
    Housing affordability at worst point in ‘at least 17 years’ … Miriam Bell … Stuff NZ

    https://www.stuff.co.nz/life-style/homed/real-estate/124350937/housing-affordability-at-worst-point-in-at-least-17-years

    Housing crisis: Auckland housing affordability among fastest-deteriorating in the world – report … Dan Satherley … Newshub

    https://www.newshub.co.nz/home/money/2021/02/housing-crisis-auckland-housing-affordability-among-fastest-deteriorating-in-the-world-report.html

    Housing through the decades, what is affordable? . VIDEO . … Tony Field … Newshub ( August 2016 )

    https://www.newshub.co.nz/home/money/2016/08/housing-through-the-decades-what-is-affordable.html

  4. It might touch 30s if the global banking crisis is as bad as I think but longer term we are in a major commodity bull market this decade with very high inflation very high interest rates caused by v high commodity prices as very longer term the USD much lower. USD will rise in the crisis but just keep falling
    Longer term AUD will be very high

  5. I dont know what it is about Australia… but this Country seems to work better when things are crashing.

    Everytime Australias happy, it just turns immediately into corruption and things are always worse then ever.