Monday, December 16, 2013

Conditions seem right for an Aussie fall | Do Central Bankers talk?

In the USA, an agreement has been reached which will ensure that there will be no repeat, for at least two years, of the partial Federal government shutdown that occurred in October, 2013, and which many believe was largely responsible for the postponement of the tapering of Quantitative Easing (QE).

If tapering is now back on the agenda, it chould lead to a stronger US dollar.

Foreign Exchange traders must be careful, however, because this has been so long in the pipeline that the market dynamics might have changed. We are also in a year-end situation when rebalancing of positions, for various reasons (Year-end bonuses, tax considerations, hedge fund payouts, whatever-you-are-having yourself), takes place.

In Australia, Reserve Bank of Australia (RBA) governor, Mr. Glenn Stevens, has, once more, reiterated his belief that the Aussie dollar must and will weaken. Our friends in Oz call this “jawboning”. Furthermore, in an interview with the “The Australian Financial Review”, he has placed a value on that prediction. It is 0.85 Aussies to the US dollar. How will he achieve this? The answer is that he is largely depending on the US Federal Reserve to do it for him, by tapering sooner rather than later. He and his colleagues are dead set against reducing the cash rate in order to get the much desired devaluation, as they believe that to do this could precipitate a housing property bubble. Nobody wants one of those.

As can be seen from the chart above, there is plenty of scope, from a historical point of view, for 85 cents to happen, particularly as we read this morning that the HSBC survey of Chinese Purchasing Managers’ Index (PMI) indicates a decline in Chinese manufacturing for December. The Australian economy is highly dependent on robust Chinese industrial activity.

Do they talk?

Mr. Stevens’s words raise the intriguing question of whether or not he is acting (or to be more precise, not acting) on an element of inside information. Has be been in contact with the Fed in an effort to find out when they might be liable to taper? Central bankers do talk, and not only at formal meetings such as the one shown below, which was held in London in 2009. Here Mr. Stevens can be seen standing directly behind Mr. Bernanke: 

At that time Madame Lagarde (bottom right) was the French Finance Minister. M. Jean-Claude Trichet, then ECB president, seems to be somewhat dazzled by the proceedings.

When Japanese authorities desired to manipulate the value of the Yen, some years ago, it is well known that there was concerted action by global central banks to facilitate this effort. So the idea that Glenn Stevens was able to contact his counterpart in the US, or some senior member that was close to the chairman of the Federal Open Market Committee (FOMC), in order to discuss the future prospects of US monetary policy, might not be too far-fetched.

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