The Australian dollar headed for its longest stretch of weekly losses since 1985, as the central bank head intensified his efforts to talk down the world’s fifth-most traded currency.
Governor Glenn Stevens signaled a weaker Aussie is preferable over lower interest rates to help spur the nation’s slowing economy. The Aussie touched a more-than-three month low of 89.14 U.S. cents after Stevens said a level of 85 cents “would be closer to the mark than 95 cents,” in an interview published in the Australian Financial Review today. The governor last month put markets on notice, saying, while the benefits of intervention haven’t “so far” outweighed the costs, it “doesn’t mean we will always eschew” currency sales.
“The RBA appears to have made a strategic decision in mid-October that they could get the Aussie down and they should try and get it lower as they downgraded their view of the resource sector,” said Greg Gibbs, a Singapore-based strategist at Royal Bank of Scotland Group Plc. “They have sent a message and the currency has reacted. The real risk by saying 85 cents is that the market feels more comfortable with the currency around current levels.”
Architects of the float of Aussie in December 1983 have said the currency must devalue and economic reform be renewed to avert recession, after the currency’s strength spurred losses at Qantas Airways Ltd. and prompted manufacturers including General Motors Co. to close operations.
The resource investment boom has made Australia uncompetitive, according to Peter Jonson, who advised the central bank chief of the time, and Ross Garnaut, who counseled then-Prime Minister Bob Hawke.
Australia’s dollar traded at 89.26 U.S. cents at 5:02 p.m. in Sydney from yesterday. It rallied 0.2 percent to NZ$1.0857 after yesterday dropping to NZ$1.0817, the least since October 2008. New Zealand’s dollar fell 0.3 percent to 82.24 U.S. cents.
The Aussie has dropped 1.9 percent over five days in an eighth-straight week of declines, the longest stretch since March 1985. The kiwi is down 0.7 percent since Dec. 6.
The RBA governor “gave a top of career performance and deserves a Best Actor award in the Central Bank Jawboning category,” Jonathan Lewis, the New York-based chief investment officer at Samson Capital Advisors LLC, wrote in an e-mail. “On command, currency traders took the currency lower” after Stevens’s comments.
Stevens will speak before the House economics committee on Dec. 18, the day of a Federal Reserve policy decision as prospects build the U.S. will trim its $85 billion in monthly asset purchases.
Australia’s dollar has dropped as much as 8.6 percent from an October high against the greenback and is the past month’s worst performer among 10 developed nation currencies tracked by Bloomberg Correlation Weighted Indexes.
A weaker currency relieves pressure on struggling industries such as manufacturing, helping rebalance an economy weighed by a slowdown in mining investment. The RBA has reduced its benchmark interest rate by 2.25 percentage points since late 2011 to a record-low 2.5 percent. Rising home prices, which Stevens said aren’t “troubling” yet, may deter him from further cuts.
He also told the Financial Review that he hopes the U.S. Fed is in a position to taper its monetary stimulus policy known as quantitative easing “before too much longer.”
The Federal Open Market Committee will probably begin reducing its monthly bond buying at the Dec. 17-18 meeting, according to 34 percent of economists surveyed on Dec. 6 by Bloomberg, an increase from 17 percent in a November poll.
Australia’s three-year bond yield fell two basis points, or 0.02 percentage point, to 2.98 percent and is down 15 basis points this week, the biggest weekly drop since July. Yields on 10-year bonds were little changed at 4.32 percent, widening the gap over the three-year rate to 134 basis points, the most since June 2009.