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90 seconds at 9 am: Slump in Chinese export growth an iron ore imports points to hard landing; A$, NZ$ fall after RBA warns against high currency

Posted in News
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Here's my summary of the key news over the weekend in 90 seconds at 9 am, including news Chinese exports rose just 1% in July from a year ago, well below forecasts for 9% growth and growth of 11.3% the previous month.

Chinese exports to Europe fell 18% in July from a year ago, while exports to the hardest-hit regions of the Euro-zone fell 40%.

Chinese import growth fell to 4.7% i n July from a year ago, down from annual growth of 6.3% the previous month.

This sharp slowdown in Chinese trading activity raised fears the dreaded hard landing has hit the most important economy for Australia and New Zealand. See more here at AFR.com

Chinese iron ore imports also fell in July for the fourth time in 5 months, indicating slowing demand from China's steel mills as construction activity slows in China. See more here at Reuters.

The Australian dollar fell from a four month high to around US$1.05, while the New Zealand dollar fell in sympathy to around 81.3 USc. See more here at Bloomberg.

The Australian dollar was also hit after the Reserve Bank of Australia (RBA) commented on Friday that the high Australian dollar could drag more on Australian growth than in the past. See more here at Bloomberg.

The comments again sparked talk that the Reserve Bank of Australia may eventually have to intervene to pull the Australian dollar down.

Both the Australian and New Zealand dollars remain stubbornly high despite falls in commodity prices as European central banks and others look to shift recently printed euros, US dollars and pounds into currencies and assets where central banks are not printing and interest rates are higher.

Former RBA board member Warwick McGibbon commented last week in an important AFR opinion piece that the RBA should look at intervening to offset the capital inflow effects of foreign central bank buying of Australian bonds.

Here's how he described this central bank buying of Australian bonds and what the RBA should do:

This is a pure portfolio shock generated in the financial market.

If foreigners want to hold more Australian dollars in order to park these dollars in foreign exchange reserves and will not be using these dollars to buy Australian goods and services, then the best response is for the Reserve Bank to print more Australian dollars. These additional dollars should be sold to foreign central banks in return for foreign assets. The foreign assets would appear on the RBA balance sheet exactly balancing the increase in money supply. There would be no effect on the domestic economy from this global shock if the RBA undertook this transaction.

This policy could be carried out either by direct transactions with foreign central banks or it could be done in the foreign exchange market by the Reserve Bank buying foreign currency equal to the amount they know foreign central banks are buying of Australian dollars. It is the case that the Australian money supply would increase but this would be by the amount of purchases by foreigners and thus domestic liquidity would be unchanged and domestic monetary policy and economic activity would be unaffected.

It is also the case that the same outcome could be achieved if the RBA held the domestic interest rate constant in the face of tightening monetary conditions caused by foreign central banks purchasing Australian dollars and driving up the value of the currency. In order to fix the interest rate, the RBA could buy government bonds and sell Australian dollars. The outcome for domestic liquidity is similar except for the changes in the composition of the RBA balance sheet where bonds are acquired instead of foreign exchange.

However, with a scarcity of high quality government debt globally and with the tendency for exchange rates to overshoot, a case can be made that it is better to use the direct intervention path and purchase foreign reserves directly in the foreign exchange market to the extent that foreign central banks are buying Australian dollars.

The questions for the Reserve Bank of New Zealand then follow:

Is the same central bank buying of NZ bonds happening here?

If the RBA intervenese in the way described above, should the RBNZ do the same?

Meanwhile, Hong Kong cut its economic growth forecast and Bank of England Governor Mervyn King warned the Euro-zone crisis had no obvious end in sight.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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9 Comments

Christchurch perspective by

Christchurch perspective by Chris Hutching of the NBR – EMPORER’S CLOTHES STRIPPED BY JOBLESS FIGURES –
 
 
http://www.nbr.co.nz/article/emperors-clothes-stripped-bare-jobless-figures-ch-125591
 
 
Noted also this mornings article at Cantabrians Unite facebook - http://www.facebook.com/CantabriansUnite  - with the weekend postings as well.
 
 
Things are becoming increasingly serious in Christchurch.
 
 
Hugh Pavletich

Former RBA board member

Former RBA board member Warwick McGibbon commented last week in an important AFR opinion piece that the RBA should look at intervening to offset the capital inflow effects of foreign central bank buying of Australian bonds.
 
Bernard you posted this last week. Are you slow or do you think the readership is? 

Stephen I am slow as well,

Stephen
I am slow as well, but I thought it was worth reminding readers who might have missed it in tbe top 10s. I think it has extra relevance now the RBA itself is now also starting to care about.
It has the that orchestrated feel to it. Arrange for a friendly soul to float the idea and then follow up by saying the idea is already being talked about ...
cheers
Bernard

So the answer is to print

So the answer is to print good aussie dollars and use them to buy crap euros or euro bonds (which can only go one way)...
I suppose once the RBA is writing down these euro assets, its balance sheet reduces accordingly...
Maybe they could purchase a few Greek Islands and Ibiza there full of Aussies anyhow..

"If foreigners want to hold

"If foreigners want to hold more Australian dollars in order to park these dollars in foreign exchange reserves and will not be using these dollars to buy Australian goods and services, then the best response is for the Reserve Bank to print more Australian dollars. These additional dollars should be sold to foreign central banks in return for foreign assets. The foreign assets would appear on the RBA balance sheet exactly balancing the increase in money supply."
 
mist, read the details contained within this link and tell me it doesn't match that which you have reiterated above. Currently the US Federal Reserve discloses an outstanding amount of USD 30,022 million.