Today Professor Warwick McKibbin – former RBA Board Member – came out and made comments about the RBA policy toward the high A$. His comments are being reported in the Financial Review – and other publications. Blogland has also picked up on the story and Macro Business wrote an article as well.
Knucklehead economists and financial journalists should have been on this story a very long time ago – even before the 2008 period.
As mentioned in previous GURU posts – the average value of the A$v$US since it was floated in 1983 is just on A$0.75c. During the GFC sell-down the A$ fell to A$0.60c in late 2008. This was from highs of parity with the SU$ only two months previously.
The sell-down was the ‘resources’ trade being unwound by global investors. Six months later the same trade went back on and nobody in the Australian marketplace showed any concern. This saw the A$ rise again and nobody was prepared to stand in its way.
On this last point – the $500 billion of infrastructure spend Treasurer Swan keeps referring to is his own form of pipe smoking – it will never happen whilst the A$ is at these levels.
Brazil and Africa have spent billions getting their infrastructure up and running with aid from China looking for cheaper markets. When they do come on stream – Australia’s mining exports will look very expensive.
The fact that it has taken this long for someone with a market reputation to come out and speak this type of language means so much. McKibbin sat on the RBA and left there 2 years ago. If it took him two years to get out of the RBA way of thinking – no bloody wonder those currently in the job have no idea.
McKibbin urges RBA to tame $A
| Author: Joanna Heath | Date: Aug 2nd 2012 | Link to On-Line Story. |
Click on image to enlarge in a new window.
Former Reserve Bank of Australia board member Warwick McKibbin is urging the central bank to intervene in currency markets to limit the strength of the dollar, suggesting that ‘safe haven’ demand from foreign central banks is artificially driving it higher even as commodity export prices fall.
An intervention by the Reserve Bank could create the perception Australia was joining the global “currency wars”.
Switzerland pegged its franc at 1.20 per euro after investors seeking a haven from the European debt crisis drove it to record highs.
The Reserve Bank has been very reluctant to enter the market to influence the price of the dollar. The currency this week traded at a four-month high of $US1.055 and a record €0.8588, after touching a record high earlier this year on a trade-weighted basis, at 78.6 index points.
“The logic is that foreigners want to hold more of our currency – they’re not wanting to buy more of our goods, they want to just hold more of our currency,” Professor McKibbin told The Australian Financial Review.
“So the optimal response is just to supply them with more of our currency and not to let that affect the economy. If you don’t supply them with more currency, then they will still buy more which will drive up exchange rates and then that will be changing relative prices in the Australian economy, which you don’t want to change.”
Professor McKibbin said the disconnect between falling commodity prices and a rising Australian dollar suggested the weight of central bank buying was playing a role in propping up the currency. Mr McKibbin’s comments come during a week of further bad news for the local manufacturing industry, with news car maker Ford could exit local production by 2016. The manufacturing industry has complained that the loss of competitiveness with importers due to the strong Australian dollar is resulting in lower profits and job losses.A number of global central banks have recently been revealed as buyers of Australian dollars and Australian dollar denominated assets such as bonds, attracted to the currency as a safe haven from economic troubles in Europe and the US. Russia, Germany, Switzerland, Kazakhstan, the Czech Republic and Vietnam are all understood to be snapping up the Australian dollar whenever it suffers temporary dips.
The United States Federal Reserve was expected to make clear on Wednesday night its intentions on further quantitative easing measures at the conclusion of its Jackson Hole conference, while the European Central Bank meets tonight. The devaluation of the US dollar and euro kick-started the trend toward investing in new reserve currencies such as the Australian dollar.
The Chinese State Administration of Foreign Exchange, which controls the world’s largest foreign exchange reserve, has also reportedly been in Australia recently meeting state government authorities to discuss bond buying.
“There are all sorts of reasons why the currency is strong – it’s stronger than you think because commodity prices have come off quite a lot and it’s stayed up around $US1.05,” Professor McKibbin said .
“I think a fair bit of that is a portfolio shift on top of declining commodity prices.
“When a portfolio shift into Australian currency is observed, the exchange rate change should be completely offset so the shock only affects the money markets rather than the real economy. If the shock cannot be observed precisely then the central bank should ‘lean against the wind’, that is intervene to slow down the extent of appreciation of the exchange rate.”
Philip Lowe, deputy governor of the RBA, hinted in a speech in July that foreign inflows into the currency markets were being closely watched.
“At least where the currency is at the moment, I think it’s hard to make a strong case that it’s fundamentally overvalued,” Mr Lowe said.
“But if these flows of capital continue to come in for purely financial reasons, we could face the issue where the currency is high for purely financial reasons, and not because of the fundamentals of the underlying economy.”
According to sources, the Australian dollar has not yet breached the RBA’s definition of fair value but is close to the upper limit at its current levels.
An intervention by the RBA to bring down the value of the currency would be the first since 1992. The bank regularly participates in foreign exchange transactions to cover government positions, and made large interventions in the early 1980s to push up the value of the currency, prompting accusations of a “dirty float”. The most recent intervention to hold up the Australian dollar was during the global financial crisis in 2008.
Other economists said an intervention by the RBA would be a dramatic move, and questioned the wisdom of such a proposal.
“It would require the RBA to bet its judgment against the collective judgments of a large number of its peers around the world in terms of what the value of the Australian dollar ought to be,” Merrill Lynch chief economist Saul Eslake said.
“It would be the RBA taking on a veritable panoply of other central banks. While in theory the RBA has a limitless capacity to create Australian dollars to meet the demand from central banks around the world, I’m not sure at the end of the day that’s a battle the RBA would ever be keen to join.”
HSBC chief economist Paul Bloxham, an ex-employee of the RBA, said it would be difficult to determine whether the Australian dollar was in overvalued territory.
“It’s not part of the standard set of tools the RBA uses as part of the monetary transmission mechanism, but in an extraordinary event . . . you could consider using that approach to contain the strength of the Australian dollar. I don’t think we’re there yet,” Mr Bloxham said.
Central banks around the world have become more active in recent years in defending the value of their currencies against so-called “overvaluation”. Brazil has been the most vocal, declaring a “currency war” in 2010 against speculative money flooding into the exporter nation, raising the real to punishing levels.
More recently, the Swiss National Bank declared a “floor” for the Swiss franc of Sfr1.20 per euro after its value skyrocketed thanks to the European sovereign debt crisis. That intervention has seen the size of the Swiss foreign exchange reserves balloon to 303.8 billion Swiss francs, prompting questions over whether the central bank can afford to maintain its intervention program.
Professor McKibbin said he was aware staging an intervention in the Australian dollar was risky.
“If you think it’s a portfolio shift and you provide the extra money you’ve done exactly the right thing, but if you think it’s a portfolio shift and it turns out it was actually a demand shift, then you’ve done exactly the wrong thing,” he said. “It’s highly dangerous. If they get it right then there should be no effects on the economy at all, except Australia would be earning extra income off the reserves. But if it turns out we’ve got it wrong we could actually damage the economy.”
The intervention could be done without a major impact on inflation and the printed money would not need to be “sterilised,” or offset by selling Australian bonds, he said.
Blind FREDDY knew what was happening to the Tourism industry five years ago. Fact is the RBA only has a mandate that targets inflation and the only way Glenn Stevens knows how to mandate that charter is by using Interest Rates. Overseas investors have siphoned off Billions of A$ wealth taking advantage of the RBA’s and Swan dumbass ‘head in the sand’ stance on Interest Rate policy through this GFC period.
Finally we might now see some movement at the station – it will be too late of course and a generation of Australians will pay the price for Treasurer Swan and the RBA’s Glen Stevens clusterfuck on the high A$ policy and stand.