The Australian monetary authorities
seem to have been depending on the US Federal Reserve to, once again, come to their aid in the matter of what is perceived by the Reserve Bank of Australia
(RBA) to be an overvalued Australian dollar. The hope seems to have been that
the Fed would signal imminent rises in core interest rates in the US, which
would have the effect of depressing the AUDUSD pair by strengthening the
Greenback. This is needed Down Under in order to assist in the transition from
a mining based economy, which is now rapidly fading into the twilight, and one that is
more dependent on internal consumption. The problem for the Aussies is that any
effort by the RBA to reduce the currency by themselves lowering rates will
exacerbate an already very frothy housing market, especially in cities like
Sydney. A property bubble is the last
thing they want or need.
Now,
a story in the “Australian Business Review” has it that, given the failure
of the US FOMC to move in the direction of rate increases in its monetary
policy statement of last Wednesday, the Australians are forced to act. According
to the story, money markets there are pricing in a 100% chance of a cut in the
Cash Rate in April or May.
Central
bank is happy with performance
Meanwhile, the governor of the RBA, Glenn
Stevens, seems to be pretty sanguine about the whole monetary situation. In a
recent speech, he gave his organisation a pat in the back, saying that Oz has
so far avoided a major upswing in inflation during the mining boom years, and a
major crash in its aftermath. Presumably with RBA assistance.
His problem is, of course, that they
are not out of the woods yet. The Aussie dollar is indeed in a downtrend (see
chart at top) but, given the overriding importance of interest rate differential
expectations in its valuation, it would take very little to push it to the
upside once again. That is, unless the RBA acts in the way the market expects.
It does not always do so.
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