The RBA has released a goldmine of analysis on how overvalued is the Australian dollar following a freedom on information request (God knows why this is not on the public record anyway. The market response was obvious though brief, above). The bottom line is that RBA reckons: Most models – including the staff’s internal models
Australian Dollar Analysis, News and Forecasts
The Australian dollar, Aussie dollar (AUD) is one the world’s great commodity currencies. Founded in 1966 and floated in 1983 the Aussie “battler” is the 5th most traded currency in the world despite the economy being only the 12th largest by GDP.
The Australian dollar spent much of its first two decades post-float consistently devaluing from the pre-float value of $1.48 US dollars in 1974 to a low of 47 cent in 2001.
Subsequently it broke this huge downtrend with the rise of the Chinese economy and it’s insatiable demand for raw materials – especially those inputs into steel production, iron ore and coking coal – which Australian was endowed with in abundance. It topped this enormous turnaround in 2011 at $1.11 versus the US dollar.
As the super cycle entered decline so too did the Aussie, falling to a low of 68 cents in 2016 and still falling.
However, the Australian dollar had became popular as a small reserve currency holding with foreign central banks. As the value of the currency virtually halved during the bust they kept buying. Because global central banks were fighting both low inflation and oversupply worldwide, many engaged in an overt currency war, deliberately devaluing their currencies to capture or protect global market share of production. This was exacerbated by private sector flows pursuing the “chase for yield”.
This proved a challenge to Australian macroeconomic managers as the commodity bust persisted. Without the lower value, the Australian economy was unable to compete in non-resource sectors. The Reserve Bank of Australia embarked on a series of interest rate cuts, jawboning and, eventually macropudential policy, to bring the Australian dollar to fair value.
There are five drivers to the currency. Australia’s relative position vis-a-vis Chinese and its own growth; interest rate differentials, the strength or otherwise of the US dollar; the terms of trade and sentiment. Each of these tips into any fair value model but over time the primary driver is the terms of trade. The relative strength of each waxes and wanes with wider trends. For instance, during the “tech bubble” of the late nineties the Australian dollar was battered lower by poor sentiment as it was seen as a pre-tech dinosaur. After the “tech bust”, the currency rapidly recovered as sentiment turned favourable for real assets like commodities.
MacroBusiness covers all apposite data and wider analysis of these issues daily.
From BS, Julia Gillard joins the cavalcade of officials seeking to boost the Australian dollar: “We can still be a country that manufactures things. But we’re going to have to do it differently…The dollar is likely to stay high for some period of time.” …”The competitive disadvantage of the high Aussie dollar is obvious but
The uncertainty caused by the Italian elections continued to reverberate around markets overnight with European stocks under pressure and the US dollar and gold benefiting materially from the malaise. The election result seems to have come as somewhat of a surprise to the established players and clearly also the markets. Stocks in Milan fell 4.9%
In 2010, 2011 and 2012 the problems of Europe hit the markets in late April and early May. I have been expecting something similar again this year given that the euphoria of the near death experience Europe is starting to give way to a recognition that the Eurozone economy is in dire straits still. The
RBA boss Glenn Stevens is in Parliament today for his annual testimony. Find below his opening statement which is noteworthy for its glass-half-full approach to the mining growth hand-off and his confession that interest rates have targeted the dollar in some measure. Sadly, markets interpreted the balance of these two arguments as bullish and added the better
The RBA’s monthly foreign transactions data is out today, and nup, still no hand on the head of the battler:
Here is what happens when serious macro managers make utterances about overvalued currencies: This is the NZ dollar losing 0.6 of cent as Graeme Wheeler, the new head of the RBNZ, said: “When the New Zealand dollar is coming under upward pressure, we want investors to know that the kiwi is not a one- way
Stocks were driven higher by the much better than expected ZEW sentiment survey in Germany with a big bounce from 31.5 to 48.2 this month for a much better result than the 35 the punditry were expecting. The Eurowide ZEW survey was equally amazing coming in at 42.4 from 31.2 last. How business sentiment has
The new and outspoken RBA board member, Heather Ridout, yesterday added the RBA’s voice to keeping the dollar elevated. From the AFR: “The Japanese election and statements by politicians had contributed to a significant depreciation of the yen since November.” Fair enough. We all know that the jawbone is a powerful tool for the senior
Cross-posted from FTAlphaville. Japanese investors are a powerful bunch in world markets. For a microcosm of this, just look at Australia; Japan plays a big role here in debt and in turn, in currency; and it’s a market that has been very attractive to foreigners of late, keeping the currency stubbornly high regardless of price
The Gillard government has released its new industry policy blueprint and it looks reasonable enough. Although Business Spectator gives it a caning, more even-handed analysis is available from Peter Roberts at the AFR: The extra $350 million to support innovation investment funds (IIFs) is a bold recognition that there remain market failures in our venture
Friday night was mixed with UK retail sales tanking 0.6% versus an expectation of a rise of 0.4% in January. US industrial production was also weaker than expected falling 0.1% in January against an expectation of a rise of 0.2% but the New York State Empire manufacturing survey was up sharply to 10 from -7.78 last
HSBC has an awesome report out on intensifying currency wars. The report is a great primer on where we’re at and who is winning: The currency war is intensifying: the number of participants is rising, fresh policy tools are being used to fight, and the scale of influence on the wider FX market is increasing. We
Terrible numbers out of Europe overnight and likewise weak growth in Japan so as Houses and Holes posted earlier much of the world shrank in Q4 2012. Certainly the Japanese weakness was unsurprising but the data out of Europe, particularly Germany, was truly disquieting and suggests that the ECB will need to ease and if a
Early strength in European stocks and the euro gave way in US trade overnight and gold is breaking lower once again. Interesting last 24 hours in markets with the S&P hit 1525 for the first time since 2007 but reversed to sit lower at present. Euro was stronger initially after comments from the Russian Finance Minister which
Wayne Swan really needs to learn how to make better use of the Treasurer’s jawbone. The AFR story that I covered this morning about Swan’s commitment to market-based currencies last night coincided with a surge in the Aussie of about three-quarters of a cent. I’ve circled the impolitic moment: Now, maybe it would have happened
From the AFR today: Treasurer Wayne Swan has declared Australia’s support for letting financial markets determine exchange rates, amid rising unease about a global currency war. Mr Swan’s move adds Australia’s voice to those of other leading nations concerned that countries are actively devaluing their currencies to boost exports and growth. In an attempt to calm
Adding to the weakening Australian dollar meme, ANZ has a note out discussing weakening (although still strong) demand for Australian government bonds. The recent fall in Australian bond tender bid/cover ratios reflects a small softening in safe-haven demand, increased credit issuance, and investor preference for riskier assets. We think demand for ACGBs will be upheld and further continued weakness
As Deus Forex Machina reported this morning, the Australian dollar has broken down and it just now hit to a new low for the move: This seems an ideal moment to check in on the crosses: As you can see, the Aussie is dropping slowly against the US dollar and euro but also against the
Late yesterday the RBA released its foreign reserve data for January and, well, nothing: Leaning against the dollar ain’t what it use to be:
Stephen Bartholomeusz of BS wrote late yesterday that: While it will be overshadowed by Julia Gillard’s nomination of the date for the next federal election, her comments on the Australian dollar occupied a meaningful slab of her address to the National Press Club today, indicating that the continuing strength of the currency is a front-of-mind
It may be hard to believe but the Bank of Japan just disappointed markets with its announcement that it target 2% inflation and print another $2 trillion Yen to buy everything in sight. From Bloomie: The Bank of Japan set a 2 percent inflation target and said it will shift to Federal Reserve-style open-ended asset purchases in
Cross posted from www.globalfx.com.au The Australian Dollar made a high at 1.0525 last night and with the Fiscal Cliff avoided, stock markets ebullient, commodities independently strong even with the overnight US dollar strength and Chinese and US PMI’s signalling an economic recovery there seems to be little headwinds to an Aussie dollar that can trade
Yesterday Capt’ Glenn of the RBA got a lot of international press for his utterances blaming profligate central banks and their printing habits for undermining the division between fiscal and monetary policy and driving up the dollar. From Sober Look: RBA’s Governor, Glenn Stevens today took a jab at the four major central banks (Fed, BOJ, EBK,