A fortnight ago, the economic pundits in the morning press told us that the value of the Australian dollar had dominated discussion at the August board meeting of the Reserve Bank the day before with comments such as:
“A big part of yesterday’s Sydney board meeting was given over to discussing the high dollar and what — if anything — to do about it. One option — not ruled out — is intervene in the foreign exchange market by selling dollars and buying foreign currency as the Bank has done on rare occasions in the past.”
And yet when you read the minutes of that meeting, issued yesterday such discussion and dominance doesn’t seem to be there. There were five mentions of the dollar and its value, including the point that the currency’s value remain high, despite the fall in commodity prices, But as we will see the problems in the eurozone remained by far the biggest fear for the central bank. Here are the five mentions of the dollar:
“Following substantial declines over recent years, tradables prices rose in the quarter, with stronger outcomes for cars, clothing, footwear and some household goods. More generally, the outcome for tradables prices suggested that the significant downward pressure on inflation from the earlier exchange rate appreciation was lessening.
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“Resource investment, which continued to evolve broadly in line with the Bank’s forecasts, spurred activity in a number of industries, while the high Australian dollar and weak conditions in the housing market had weighed on activity in a number of non-resource industries.
“Members observed that the outlook for inflation was little changed. Reflecting the waning disinflationary impact of the earlier exchange rate appreciation and the introduction of the carbon price, the staff forecast was for underlying inflation to pick up gradually to the top half of the target range by mid 2013.
“Members noted that the Swiss National Bank had purchased around €100 billion over May and June, with further sizeable purchases likely to have occurred in July. While some of these purchases were retained in euros, a sizeable share was converted into other currencies, including a modest amount in the Australian dollar.
“At the same time, however, the exchange rate had remained at a relatively high level, notwithstanding the weakening in the global outlook and decline in many commodity prices.”
Reading those we would conclude that the central bank is starting to be more concerned about the “waning disinflationary impact of the earlier exchange rate appreciation” which could see inflation start rising later this year and into 2013, especially in the so-called tradables sector (those goods exposed to world competition).
“More generally, the outcome for tradables prices suggested that the significant downward pressure on inflation from the earlier exchange rate appreciation was lessening,” the central bank said in the minutes. And given those concerns, to reckon the RBA would be interested in driving the value of the dollar lower, and risk sparking a rise in the value of imported goods and the current low level of inflation?
The minutes were far more explicit on the major threat for Australia: the unstable eurozone: “The risk of significant economic and financial disruption in the euro area continued to cloud the outlook.” And: “The global economic environment remained fragile, with the uncertainty emanating from the euro area affecting financial markets and potentially delaying spending by firms and households.”
That is far more direct a comment than anything said about the value of the dollar. Unlike the value of the dollar, the eurozone’s woes have the potential to crunch the Aussie economy, as do a sharp slump in China (which remains a possibility). Another concern for the RBA is the continuing indecision in the US about spending cuts and borrowing and the impact of the forthcoming elections. The RBA seems to grouping the dollar, China and the US as a group of lesser worries, well behind the problems in Europe.
And, if anything the dollar is not seen as a threat except in the area of inflation, as the bank explained in the minutes. The RBA seems to see the high value (it was trading around $US1.480 this morning after rising above $US1.050 overnight) of the currency as more of a restructuring force for wide sections of trade exposed industry than a hindrance to the economy as a whole.
But in the past week the mob chanting for some sort of intervention to cut the value of the dollar seem to have moved on (to the Gillard Slater and Gordon story perhaps?). Comments from the current head of Treasury, Martin Parkinson and his predecessor, Ken Henry, on the futility of intervention at all levels, seem to have taken the steam out of this mob of chatterers. That though hasn’t stopped some in this camp from urging the RBA to cut rates.
But in comments in Perth yesterday, ANZ CEO Mike Smith knocked the rate cut and intervention ideas on their heads. He was quoted as saying that intervention by the Reserve was unlikely to work for more than a few days and even a 1 percentage point cut in interest rates would have little impact, given near zero rates overseas. It’s a pity some or the urgers on the intervention idea (such as Professor Warwick McKibbin and AWU boss, Paul Howes), didn’t stop to think along these lines, or perhaps ring the likes of Mr Smith and try their ideas on him for a reaction.
As mentioned above, the RBA confirmed in yesterday’s minutes the stories in Crikey in July and August that buying of the Australian dollar by the Swiss National Bank had played a part in keeping its value high, along with buying from other official sources offshore:
“Members noted that the Swiss National Bank had purchased around €100 billion over May and June, with further sizeable purchases likely to have occurred in July. While some of these purchases were retained in euros, a sizeable share was converted into other currencies, including a modest amount in the Australian dollar.”
Until that buying fades, the dollar’s value will remain high. Sometime in the immediate future the market reality of the currency’s mis-alignment with weak commodity prices , our falling terms of trade, and concerns about China, will see a correction in the value of the currency. That’s assuming that the eurozone doesn’t return to bite the global economy once more, which remains very possible.