Yes, the dollar is strong; no, the RBA won't intervene
There’s a subtle difference between the Reserve Bank cutting the cash rate to offset the impact of the strong Australian dollar and the Reserve Bank cutting the cash rate in an attempt to weaken the strong Australian dollar. It’s a subtly that the forex market seems to miss.
RBA assistant governor Guy Debelle talking about cutting the cash rate today is pretty much repeating what the RBA governor and deputy governor told the House of Representatives economics committee on Friday.
Nothing new to see here, move along – but by its flighty nature, the forex market had a little flit anyway, pushing down the dollar by nearly half a US cent. Hey, what screen jockey has the time to read to the bottom of a long Hansard entry? And once the market moves a little, it’s the movement that counts, not the reason for it.
The market is bigger than the RBA – a central bank standing in the face of the market can be trampled.
What the G, the DG and the AG all said is that, yes, they’re a bit surprised that the Australian dollar has stayed as strong as it has and that, yes, it would be nice if it was a bit weaker. But they have specifically ruled out trying to weaken it at this stage because it’s not way-too-far out of kilter.
As Stevens said, to attempt a major intervention against the massive forces of the market, the bank would have to be very confident that the market was seriously wrong.
What wasn’t spelt out on Friday is that the RBA really can’t do much about it. The market is bigger than the RBA – a central bank standing in the face of the market can be trampled. And we can’t just cut interest rates to zero and peg our currency the way the Swiss have done, as Governor Stevens explained in an interview in December.
What the bank can do is loosen monetary policy to stimulate the economy a bit in an attempt to balance the contractionary effect of the strong dollar. The governor and his deputy were specific about that on Friday. Here’s part of what the DG, Philip Lowe, told the committee:
“I think the big picture here is we are ending up with a policy configuration of a very high exchange rate and low interest rates. The low interest rates are not specifically designed to try to get the exchange rate to come down but they are offsetting the contractionary effects of the high exchange rate on the economy.
“We are ending up with this configuration, because exchange rates are relative prices and the Australian economy is doing relatively better than the North Atlantic economies where there is very large money creation going on and very weak economic conditions. Those outcomes mean that their exchange rates are tending to be low. If they are going to be low, someone else has got to be high, and that is us. We are responding to the contractionary effects of that with low interest rates.
“You could argue we would be better off with some different configuration: a lower exchange rate and higher interest rates - or more normal level of interest rates - but, given the configuration of the global economy, I just do not think that is possible at the moment. The weakness in the North Atlantic and their money creation is leading to their currencies wanting to depreciate, and someone has to be high.”
From the point of view of the moment-to-moment forex market, any mention of an interest rate movement is itself good for a movement, but there’s nothing much fundamentally happening here. Move along.
Michael Pascoe is a BusinessDay contributing editor