By Roger J Kerr
A decent dose of central bank jawboning (verbal intervention) on the Australian dollar from RBA Governor Glenn Stevens last week has pulled both the AUD and NZD down against the USD as the year-end approaches.
The choice of words and timing of the comments by the RBA Chief was not coincidental, the RBA has been concerned that the recent rebound up in the AUD to above 0.9500 again will damage the much needed investment and output expansion on the non-resources export sector in Australia.
Glenn Stevens did not say outright that the RBA would intervene to lower the AUD; merely that direct FX market intervention was always one of the options in their monetary toolkit.
From rates above 0.9400 against the USD early last week, the AUD was sold down heavily on the intervention talk to lows of 0.9150.
The Kiwi dollar tracked the AUD down, however to a lesser degree as our NZ economic data continues to be superior to Australia’s and the forex markets recognise this.
As a result of the NZD/USD out-performance the NZD/AUD cross-rate has returned to highs above 0.8900.
Over the years when the RBA has intervened in the AUD currency markets it has generally been successful and the markets are well aware of that effectiveness.
In the New Zealand context the RBNZ Governor also has direct intervention as an option to attempt to depreciate the NZ dollar; however the markets here know that it is used reluctantly as it is a popgun against an elephant in terms of likely success and effectiveness.
However, the dominant influence on the Kiwi dollar is always AUD direction, so the latest AUD weakness has pulled the Kiwi lower to trade below previous key support levels at 0.8200.
The NZD/USD exchange rate reached a low of 0.8132 on Friday night 22 November.
The market sentiment and outlook for the Australian dollar is certainly at the most negative it has been since the budget deficit inspired sell down from $1.0500 to 0.8900 in May/June.
A good number of economic commentators in Australia still expect the RBA to be forced to cut their OCR interest rate further from the record low of 2.50%.
The RBA would probably prefer that the AUD depreciates to loosen monetary conditions rather than lowering interest rates any further with the housing markets in Sydney and Melbourne hotting up again.
Many argue that there is no income growth in Australia therefore house price increases are not a threat to inflation.
The argument is that it is purely the speculative investment forces in the residential property market that are behind recent price increases, not across the board household demand.
The verbal intervention from the RBA last week is consistent with the view that they prefer a lower currency over lower interest rates.
Looking ahead at the likely direction of the AUD in 2014, it is how the FX markets will start to price-in the falling away of capital investment inflows into the mining sector.
Whilst the dollar value of offshore inward investment into Australian mining/energy projects is not expected to reduce until 2015, the currency markets will anticipate this lower level of AUD buying and reduce AUD investment /speculative holdings much earlier.
The Aussie dollar’s heyday over 2009 to 2012 is certainly over in the minds of global investors as its safe haven status from a weak USD is now a thing of the past. Australia’s relatively poor economic performance in 2013 certainly justifies a lower currency value.
The absence of large capital inflows will add to the adjustment to a weaker currency value.
The expected strengthening path of the USD against the Euro has been temporarily interrupted by dovish comments from the incoming Federal Reserve Governor, Janet Yellen and stronger than anticipated German economic conditions.
After trading below $1.3400, the EUR/USD rate has returned to $1.3550. The Euro recovery, coupled with the recent NZD weakness (due to Australian factors) has driven the EUR/NZD cross-rate back to 0.6030 after trading in the 0.6100/0.6200 region over recent months. Whilst the NZD has for the meantime out-performed the AUD against the USD, such gains are unlikely to be sustained. We have seen in the past with global investors, who pick and choose to alternatively be in the AUD or the NZD that they do like to re-position back to the AUD when the NZD/AUD cross-rate moves above 0.8900.
The Kiwi dollar has some catching up to do on the weaker AUD, therefore the NZD/USD appears set to trade lower again below 0.8100 to 0.8000 over coming weeks.
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Roger J Kerr is a partner at PwC. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
2 Comments
The choice of words and timing of the comments by the RBA Chief was not coincidental, the RBA has been concerned that the recent rebound up in the AUD to above 0.9500 again will damage the much needed investment and output expansion on the non-resources export sector in Australia.
I am sure about that:
A question arose about whether a new equilibrium value for the $A had been created. The currency was probably still above its longer-term equilibrium value, he said, but it was not entirely clear what the new equilibrium was. The forces that had pushed the $A up in the last half-decade were unlike those at work in the first 25 years of its life as a floating currency, and were very powerful.
Stevens was first talking about balance sheet valuation risk with those comments - the risk of asset value write-downs if it sells the $A and buys foreign exchange only to see the $A rise further. Ahead of any new buying, it owns about $36.6 billion of foreign currency. A 10 per cent rise in the $A's value would create a paper loss of about $3.6 billion on that base alone. Read more
Yesterday’s release of the Reserve Bank of Australia annual report shed some light on the controversial $8.8 billion cash injection to the Bank that Treasurer Joe Hockey announced earlier this week. Read more
But Mr Stevens admitted Thursday night that the multi-billion dollar figure was suggested by the RBA, and not the other way around.
“Everybody knows that the capital was run down when we suffered valuation losses,” Mr Stevens said. Read more
Furthermore, readers might wish to note that the success of the RBA Governor's jawboning coincided nicely with dealers closing off their books for 2013 following a profitable AUD/USD recovery run up from ~0.8900 to ~0.9600. Bonus calculations are an ever-present activity at this time of year.
The Interest .co.nz Headline is misleading ....Aussie has to weaken its Dollar somehow otherwise the risks to its resource sector are too great .
Its economy is too open and flexible for its "days to be over " just yet .
Its really risking becoming a victim of its own success , almost a mild form of Dutch disease .
Itrs a pity we are not following suit wrt the Kiwi $
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