The Aussie dollar hit US$1.10 this morning, a 30-year high against the greenback. It’s great news if you’re planning an Aussie winter jaunt to Palm Springs, not so wonderful if you’re an exporter or manufacturer in Australia.
With the rising dollars comes calls for the Reserve Bank of Australia (RBA) to intervene in foreign markets and help to talk the dollar down. But how does the RBA talk a strong dollar down? What’s the likelihood of an intervention and what impact would it have?
Crikey asked some of our top economists for their take.
Paul Bloxham, chief economist for Australia and New Zealand HSBC: I don’t think there’s very much you can say that will talk down the dollar. The Aussie dollar is a very well traded currency and the market is liquid enough that talking it down doesn’t have an effect on its level. The main thing that will determine it will be the rhetoric from the RBA tomorrow in regards to interest rates [if they say they won’t rise them]. First, let me point out that I don’t expect them to do that. The RBA will be thinking the strong currency is helping them contain inflation, and I suspect the RBA won’t be trying to talk down the dollar. The major impact will be what they say they will do about rates. We expect it will be more hawkish. The markets are suggesting the RBA will be looking to lift rates and that is likely to see more capital flow towards Australia and put upward pressure on the exchange rate.
I think central banks can have an influence on their currency in that way [in talking down the value of their currency]. But Australia has a free floating exchange rate, so we don’t have a tendency to do this. We have a very highly traded currency and so moves by the RBA, even if they were considering trying to stem the extent to which the dollar appreciates, the market flows would overrule them. Most of the Asians economies have managed floats and they manage the flows and their exchange rates. But we don’t have that system. If the RBA attempted to do it, it wouldn’t be particularly successful and I think they know that.
Tom Elliott, managing director of MM&E Capital Limited: It’s a difficult one. Best thing to do is to say that interest rates aren’t going up, but the RBA can’t do that as the last inflation data was quite strong. Ben Bernanke announced in the US last week that they wouldn’t touch interest rates for a long time. The RBA can’t possibly say that. They could say “we think it’s overvalued”.
The other thing they can do is open market operations, where they sell AU dollars and buy US dollars. When the foreign exchange market bombed out, the RBA sold foreign currencies and bought Australian dollars. It’s not easy to talk a currency down without talking about the currency. But engaging in open market operations, that would probably knock a few cents off it. The RBA has been pretty good in the past and they’ve made a lot of money by intervening. In the US, they’re a “Don’t fight the Fed” mentality, but the market doesn’t think that way about the Reserve Bank. It’s hard to say whether they should or shouldn’t. It’s not good for the economy, but it’s helping keeping a lid on inflation. But if they came out and said we’re not putting up interest rates for a year, the politicians would love it, the public would love it and the Aussie dollar would go down, but they’re not going to do that.
Bill Evans, chief economist at Westpac: I think that whether the RBA wants to intervene or not depends on whether their data says the acceleration has been sharp. What we’ve seen is it up 5 cents in a couple of weeks, that’s borderline. But sharp movements to the downside worry them a lot more, so I would be very surprised if they were intervening in the current situation.
They have the power to adjust the other policy settings, given what we saw last week, which signalled the potential for rate hikes. [They could] use tomorrow’s statement to say they are in no hurry to moderate rates, but I don’t think they will. I think they’ll be careful for people to realise they have taken a jump inflation seriously, but they’re not ready to move rates.
On the occasions they have intervened and it’s become known to the market, it’s had quite an impact. You don’t want to be buying when the RBA is selling. Their supply reserves are fairly limited, not like Japan or the Fed, instead the RBA’s level of reserves are roughly $20-30 billion. So people are aware that there’s limited intervention available.
The policy is that they never target a level, but they do get interested if they’ve seen a strong move in either direction. The move so far is line ball and unlikely to lead to any action and partly because as inflation fighters, the rising currency is more helpful to them then when it’s falling.
Associate Professor Steve Keen, University of Western Sydney: Even though the currency looks fabulous, there are lots of reason to expect it to turn around at some point, and the people who are extrapolating a permanent rise in the currency are kidding themselves. Anything that rises this quickly is a bubble. It’s speculative, it will burst and when it bursts you’ll see a far faster fall because the carry trade will be in reverse. You’re welcome to gamble on it, it’s a gamble where you win little and lose big.
The RBA has been very lax in letting the dollar rise as much as it its has, interest rates have helped that. They have been paying too little attention to it. They’re ignorant of the Dutch disease. Our tourism industry and education industry are being screwed by the high dollar, but the damage has been done. You can’t just reverse it.
It should be talked down. The reserve bank does this by pointing out that the currency is overvalued and warns of the dangers of having a speculative hold of the dollar. Put people who do speculative buys into a fear. [This government is busy] discouraging people smugglers, we’ve been encouraging dollar smugglers and we need to scare them off. If there was a cut in interest rates, that would cruel the currency trade.