For
a number of years the Swiss monetary authorities, political leaders and trade
union officials believed that there might be some sort of conspiracy to make
the Franc rise no matter what the central bank did to try to reduce its value.
They cut interest rates to zero and then into negative territory. When that
failed and their currency continued to rise, they established a cap on its
value against the Euro and promised that they would use whatever was required
from their capital reserves in order to maintain it.
The
introduction of Eurozone Quantitative Easing made even this measure untenable
for the Swiss and earlier this year they abandoned the cap, causing a melt-down
in the equity of Forex traders, and indeed Forex brokers, when the franc
appreciated wildly in a matter of minutes against the Euro following the
announcement.
RBA cuts rates but Aussie dollar
still rises
Now
something similar seems to be happening in Australia. The Reserve bank of
Australia cut its core interest rates last week, a circumstance that would normally
cause a marked drop in the value of the Australian currency.
Not
this time, however. As can be seen in the chart above, the cut seems almost to
have had the opposite effect. The reality, of course, is that the Aussie is
rising in spite of the cut, not because of it, on the back of recently announced
economic stimulus measures in China, one of Australia’s largest export markets.
But
the RBA is worried. The statement that accompanied the rate cut talked about rising
house prices, especially in Sydney, and about the RBA working with other
regulatory agencies to “assess and contain risks that may arise from the
housing market”. That is code for the possible introduction of macro-prudential
policies, which would attempt to place limits on lending for residential
property purchase. If this worked to contain the housing bubble then further interest rate cuts could be
considered.
As
the Kiwis, Swiss and others might say to Glenn Stevens and his colleagues: “Good
luck with that”.
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