Sunday, May 17, 2015

Is Australia the new Switzerland? | RBA cuts rates but Aussie dollar still rises

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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