The Reserve Bank governor’s comments yesterday on the refusal of forex markets to take the value of our currency lower would have earned a “hear hear” from Treasury, the government and exporters large and small.
Slowly but surely the continuing high value of the dollar is once again tightening its grip the economy and threatens to derail the transition from the dying resources boom to domestic demand. And it will produce a replay of the situation that distorted the budgets of the Labor government from 2011 to 2013.
RBA governor Glenn Stevens (and no doubt the RBA board and other senior bank officials) reworked previous comments on the value of the dollar from the June statement to make plain the increasing level of frustration:
“The exchange rate remains high by historical standards, particularly given the declines in key commodity prices, and hence is offering less assistance than it might in achieving balanced growth in the economy.”
Compare that to the June meeting statement:
“The earlier decline in the exchange rate is assisting in achieving balanced growth in the economy, but less so than previously as a result of the higher levels over the past few months. The exchange rate remains high by historical standards, particularly given the further decline in commodity prices.”
In other words, the bank now sees the refusal of the dollar to fall as working against the direction of the economy in that the impact of the depreciation in 2013 is disappearing.
And what happened to the value of the dollar after Stevens’ statement? Why, it rebounded to a seven month high of 95.05 US cents in US trading — think of that rise as a sort of two-fingered salute from the forex market to the RBA.
The dollar rose because of two factors: the better-than-expected news on the health of Chinese manufacturing and a growing expectation that the next move in local interest rates will be up — not this year, but sometime in 2015. But the surging dollar, which acts like a rise in interest rates, might have something to do with disproving that expectation wrong, again, as it did in 2011-13.
To understand the bank’s growing frustration with the dollar’s resilience, consider this graph also released yesterday:
The RBA Commodity Price Index is a proxy for our terms of trade, and it shows that since the peak of the commodity price boom in September 2011, the index has slumped 31% and yet the dollar has only fallen to around 94 to 95 cents from more than $US1.01 to $US1.03 — a fall of around 9%. We are now back to levels last seen four-and-a-half years ago in February 2010, and yet the dollar is currently well above the 88-91 US cents range it was trading at at the start of 2010, even though commodity prices were on the upswing back then.
The dollar should have lost value as our terms of trade slid from late 2011 onwards, but that hasn’t happened. That has destroyed tens of billions of dollars of export income, tax revenues and higher national income for Australia. Of course, on the plus side, it has lowered the cost of hundreds of billions of dollars in imports, taking pressure off inflation, and it has also put pressure on domestic demand via sliding real wages.
Falling commodity prices and a resilient dollar are a double whammy for Treasurer Joe Hockey and Treasury: our exporters are getting less for the dirt they’re shipping overseas, but without the offsetting benefit of a lower currency, meaning lower tax revenue, while our manufacturing exporters also continue to do it tough against foreign competition.
Wayne Swan faced a similar problem as treasurer — while he at least until 2011 enjoyed a period of rising commodity prices, the dollar was even stronger, spending much of 2011 between 105 and 110 US cents, undermining tax revenue and acting like a suffocating blanket on the economy.
Hockey had no sympathy for Swan back then — he insisted Labor had a spending problem, not a revenue problem, and that it was simple incompetence that led to Swan giving up on his goal of a return to surplus. Hockey has tried to avoid a similar fate — and make Labor look worse in retrospect — by taking Treasury’s worst-case forecasts, which is the reason why his Mid Year Economic and Fiscal Outlook forecasts last December ended up looking absurdly gloomy.
Swan compounded his problems by spending two years swearing on the nearest stack of bibles that he’d achieve a surplus, including with the immortal phrase “come hell or high water”. Hockey’s office gleefully toted up all of those commitments to throw back in his face when he had to give up in December 2012. But Hockey, even though he hasn’t promised a surplus, has made the same error: his whole narrative on the economy is about greater fiscal discipline and an end to Labor’s profligacy, driven by a punitive budget that has seriously damaged the government’s standing with the electorate.
What if the bulletproof dollar does to Joe what it did to Wayne? All that pain will seem to be for nothing …