Australia’s central bank Governor Glenn Stevens said the local currency’s level isn’t supported by costs and productivity in the economy and the nation’s terms of trade are more likely to fall than rise. The Aussie dropped.
“The foreign exchange market is perhaps another area in which investors should take care,” Stevens said today in the text of a speech in Sydney. “It seems quite likely that at some point in the future the Australian dollar will be materially lower than it is today.”
The Reserve Bank of Australia left the cash rate unchanged at a record-low 2.5 percent for the past two meetings as it gauges the impact of earlier reductions on the economy and the outlook for global growth. Stevens said China’s expansion remains “robust” and the U.S. appears to be “healing,” while noting the greenback had eased after the Federal Reserve opted against beginning a tapering of bond purchases.
“It would be a mistake to relax for very long in the face of this delay. Surely the ‘taper’ will come,” he told a Citigroup Inc. conference. “For some countries, including Australia, the beginning of a return to something resembling more normal conditions, in at least one major advanced country, would lessen some of the difficulties we face in our own policy choices.”
The Australian dollar touched 95.30 U.S. cents after the speech, the weakest since Oct. 17, from 95.75 cents just before it was released. The currency traded at 95.43 cents at 10:48 a.m. in Sydney.
The comments were “jawboning trying to get the currency to go down and it’s worked,” said Stephen Walters, JPMorgan Chase & Co.’s chief economist in Australia. “But they want it a lot lower than this, which to me suggests in the 80s somewhere.”
The RBA is balancing low rates that are driving up housing prices against renewed strength in the Australian dollar -- among the best performers of group of 10 currencies since late August -- that is constraining industries exposed to exports.
Stevens said today that “some” rise in housing prices is a normal response to lower rates and will provide incentive for residential construction, adding that given credit growth is between 4 percent and 5 percent per annum at the moment, it is “a little too early to signal great concern” over price gains.
The caveats, he said, is that credit growth may pick up over the period ahead and and borrowing is increasing “quite quickly” in some pockets of the country.
“Investor participation in housing in Sydney, in particular, is becoming noticeably stronger,” he said. “Over the past year, the rate of finance approvals for this purpose has increased by 40 percent.”
Traders are pricing in little chance of a rate reduction by the central bank this year, according to swaps data compiled by Bloomberg.
Stevens also noted today that the strength of the exchange rate in recent years also had a significant impact on the central bank’s balance sheet. Treasurer Joe Hockey announced last week the government will inject A$8.8 billion ($8.4 billion) into the central bank’s depleted reserve fund.
“The effect of this is that instead of it taking many years to rebuild the capital, it will occur in the current year,” Stevens said. “This results in a stronger balance sheet on average, and makes it likely that a regular flow of dividends to the Commonwealth can be resumed at a much earlier date than would otherwise have been the case.”