Friday, November 22, 2013

Words as bullets - Glenn Stevens mouths "intervention" option and dollar falls

The overnight fall in the Australian dollar shows - once again - that just a few carefully targeted words from Glenn Stevens have the power to move markets.

While Mr Stevens didn't say the Reserve Bank was about to intervene to pull the dollar down, his comment that the option was in the monetary policy "toolkit" proves that words from central bank governor can be timely bullets.

And the impact-laden comments show the Reserve Bank's frustration in its attempts to lower the dollar, despite 2.25 percentage points in cash rate cuts since late 2011.

The dollar's fall accelerated as Mr Stevens rolled out  the "intervention" word, even though he has used this type of language before in keeping the option open and refusing to rule anything in or out.

But speaking to an audience of dollar-focused market economists and journalists, Mr Stevens knew his comments would hit the newswires immediately and take the stubbornly high dollar even a bit lower.

"Our position has long been and it remains that intervention can, in the right circumstances, judiciously used, be effective and useful," Mr Stevens told the Australian Business Economists annual dinner in Sydney last night.

"It can't make up for policy weaknesses in other areas and it can't really stand against fundamentals but subject to those conditions, if it works with fundamentals, it can be effective and so it remains part of our toolkit."

"That doesn't mean we will always eschew intervention."

While the wording was calm and measured, there was no doubt about the Glenn Stevens' intentions.

Mr Stevens knows even light-hearted comments about Reserve Bank deliberations can set blood pressures racing.

Back in July, Mr Stevens said that the RBA board had “deliberated for a very long time” when it decided to keep the cash rate on hold.

Market economists took that to mean that a rate cut was on the agenda and revised their forecasts accordingly.

Mr Steven’s deputy Philip Lowe was forced to clarify the next day that the comments were part of “a very light-hearted introduction” that the media had misinterpreted.

But even before Glenn Stevens started speaking last night, the Australian dollar had been gradually falling.

It was well-telegraphed that Mr Stevens was the keynote speaker at the dinner so the decline was partly in anticipation of Mr Stevens' likely "jawboning".

Much earlier on Thursday morning the dollar fell from a high of 94.05 US cents after the US Federal Reserve said it might reduce its massive stimulus program "in the coming months".

The decline continued until the dollar bottomed at 91.98 US cents at 5.24 AEDT in what appears to be partly via the Stevens "intervention" comments and heavy selling of the Australian dollar from the United States.

Taking all factors into account, the Australia dollar fell by more than two US cents over that period.

But this morning as reality about the Reserve Bank's task of taming the dollar returned, the dollar recovered to as high as 92.66 US cents.

The Australian dollar has rocketed in the recent years to a peak of 110.61 US cents in August  2011 after Australia sidestepped the global financial crisis and China-led mining investment boom spurred growth.

But manufacturers and exporters have been squeezed,  prompting changes on the industrial landscape including the decision by Ford to exit Australia in 2016.

With a cash rate of 2.5 percent and concerns about rising property prices, the Reserve Bank will be reluctant to cut rates again.

So with the rates cut instrument likely to remain idle in the monetary policy toolbox, talk of currency intervention in the right circumstances is likely to become louder especially if the US Federal Reserve delays its stimulus windback.

1 comment:

  1. Well a timely comment but the value of A$ is nowhere near the 2008 pre crisis level eg £1 = A$ 2.45. I cannot see it returning to this level though the RBA did not indicate where it believes the level should be against the US$


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