Wednesday, August 6, 2014

Aussie dollar hit by poor employment figures | Watch out for macro prudential policies Down Under

A poor employment figure report in Australia overnight has resulted in a sharpish drop in the value of the Aussie dollar against its main counterparts. This serves to reinforce a softening in the unit that has been apparent in the last week or so, as can be seen from the four hour chart above.

But the Aussie is very resilient, due to its popularity as an investment currency for the carry trade, where money is effectively borrowed in a low interest rate environment and lent out where rates are significantly higher. Price is just starting to dip below the 200 period EMA on the daily chart (below) and would need to move below this level in a convincing manner in order to confirm that a downtrend in AUDUSD might be imminent.

Macroprudential policy

The Reserve bank of New Zealand (RBNZ) has instituted what are known as “macroprudential” policies, which is to say that they have placed restrictions on the loan-to-value and other measures related to mortgages granted by the country’s banks. This was to forestall the possibility of a property bubble. Similar measures have been put in place in the UK.

 It is widely believed that the main reason why the central bank in Australia, the RBA, has been reluctant to reduce interest rates in order to lower the value of the Aussie dollar, which is much desired in order to stimulate exports, is a fear of a property bubble.

Now many economists Down Under, most notably Callum Pickering, writing in Business Spectator, have been calling for just such tightening rules on mortgages in order to clear the way for monetary easing.

So we will be watching out for such moves from the RBA. Any suggestion that restrictions of this sort might be placed on housing loans in Australia would be a clear indication that a reduction in rates, and therefore a weakening of the Aussie, might be in prospect.

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