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News Analysis: Governor's remarks bring down Aussie dollar

English.news.cn   2013-12-17 15:54:12            

by Samuel Poon

CANBERRA, Dec. 17 (Xinhua) -- Reserve Bank of Australia (RBA) Governor Glenn Stevens indicated recently that he would prefer a lower dollar to lower interest rates as a mechanism to spur the Australian economy.

Stevens made the comment just weeks after he explicitly declared currency intervention to be part of his "toolbox".

"To the extent that we get some more easing in financial conditions, at this point it's probably more preferable for that to be via a lower currency at the margin than lower interest rates, " said Stevens.

"I thought 85 U.S. cents would be closer to the mark than 95 U. S. cents... but really, I don't think we can be that precise," he said in an interview published by Australian Financial Review last Friday.

Late on that evening, the currency dropped to as low as 89.10 U. S. cents, its weakest level since late August.

On U.S. monetary policy, which has driven down the value of the U.S. dollar, Stevens expressed a hope the U.S. Federal Reserve would begin tapering its money-printing program "before too much longer," saying it would be a "good news story" for both the U.S. economy and Australia.

Financial markets are pricing in the likelihood of the U.S. Federal Reserve reducing its 85 billion U.S. dollars in monthly bond purchases this week.

"The market is priced for something to happen," said UBS Global Asset Management head of investment strategy Tracey McNaughton. " The Australian dollar is where it was in September when the market really thought that the Fed would taper but it didn't."

At that time, the Fed said it decided to hold off on tapering on concerns about the U.S. government's budget negotiation and debt ceiling standoff, but now those issues have been resolved.

"If anything, since September the economic data has improved, so the Fed is running out of reasons why it should not taper," McNaughton said.

BT Investment Management head of income and fixed interest Vimal Gor said, "I think the Fed would like to taper as soon as possible."

"The decision when to taper will be driven by politics, be it the end of the Bernanke legacy or start of Janet Yellen as Fed chairman. It will not be driven by economic data," said Gor.

He said that the RBA would really like to see a weaker Australian dollar to help stimulate the economy. "A weaker dollar would help lift business confidence and impact growth much more than lower interest rates," said Gor.

But not everyone thinks that the Australian dollar is headed lower in the coming weeks.

Westpac chief currency strategist Robert Rennie thinks the currency should move back above 90 U.S. cents on the assumption that the Fed won't taper its stimulus program until 2015.

"I think the market has got ahead of itself on thinking the Fed will begin tapering in December," said Rennie, "Not a lot has changed since September when the Fed backed away from tapering."

A mix of better than expected U.S. economic data in terms of retail sales, manufacturing and jobs figures in November has got other investment experts also picking a March taper date.

"On the taper, it is a close-run thing but we think the Fed will still err on the side of caution and wait a bit longer," said Commonwealth Bank of Australia chief economist Michael Blythe."We have the taper starting in March on our forecasts."

Stevens pointed to problems with such regulatory interventions, downplaying the idea that they could be on the Reserve Bank's agenda for 2014 to help revive the soft economy.

The governor's remarks followed recent signs the economy is starting to adjust to the end of the mining investment boom, something could create a "growth gap" until non-resources sectors picked up the slack.

Stevens said demand was likely to remain below-average for "a little bit longer than I would have hoped a year ago", but he pointed recent gains in consumer confidence and construction.

"It always seems to be the case that in most cycles I can remember that you're waiting a fair while for that upturn to come, but it eventually does come and it quite often comes with a rush when it does turn."

The remarks suggest the Reserve Bank is likely to keep official interest rates on hold in coming months after delivering 2.25 percentage points of reductions over the past two years.

Related:

Australian economy faces challenges of high dollar, less investment: IMF

CANBERRA, Nov. 20 (Xinhua) -- The International Monetary Fund ( IMF) has noted that Australian economy is faced with a number of challenges including a high dollar, but the economy will return to trend growth of 3 percent by 2016, the Australian Treasury said in a press release Wednesday.Full Story

Low interest rates help boost Australian economy: central bank

SYDNEY, Nov. 19 (Xinhua) -- Low interest rates are helping boost Australia's economic activity, the Reserve Bank of Australia (RBA) said in the minutes of its November board meeting released on Tuesday.Full Story

Editor: Mengjie
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