Central bankers across the Asia-Pacific region are laying down arms in the global currency war as they prepare for the Federal Reserve to raise interest rates.
By dropping a call for a weaker exchange rate in his monetary-policy statement on Tuesday, Reserve Bank of Australia Governor Glenn Stevens followed the lead of New Zealand’s Graeme Wheeler, who toned down concern the kiwi dollar was too strong two weeks earlier. In Japan, Haruhiko Kuroda said last month he had no plans to expand the record monetary stimulus the central bank is pumping into the economy.
That doesn’t necessarily mean an end to losses for the currencies of the region’s major developed economies. Rather, it shows the prospect of an increase in U.S. interest rates is relieving pressure on peers to loosen policy. Australia’s dollar has already tumbled to within a cent of strategists’ median prediction for year-end, while New Zealand’s kiwi and the yen dropped below their forecasts in June and July.
“This is a temporary truce based on a Fed rate increase,” said James Rickards, author of “Currency Wars: The Making of the Next Global Crisis” and chief global strategist at money manager West Shore Funds. “These banks are going to stand pat in anticipation of” the Fed, “making the dollar stronger and their currencies weaker, with no further action by them.”
In his statement after leaving the main rate unchanged at an all-time low of 2 percent, Stevens referred to the prospect of higher U.S. borrowing costs and said the Aussie “is adjusting to the significant declines in key commodity prices.” It was the first time in more than a year that he refrained from signaling the currency was too strong.
Australia’s dollar jumped 1.3 percent, the most in two months, to 73.80 U.S. cents on Tuesday. That’s up from a six-year low of 72.35 on July 31 and compares with the 72 cents strategists predict for year-end. The Aussie was at 73.76 as of 8:09 a.m. New York time on Wednesday.
“Heat has come out of the currency wars,” said Sean Callow, a strategist at Westpac Banking Corp. in Sydney. The stronger U.S. dollar is “a key factor” here, he said.
Even so, Stevens needn’t worry about a sustained Aussie rally, Callow said.
New Zealand’s dollar is little changed since Prime Minister John Key, a former head of currency trading at Merrill Lynch, said July 20 the exchange rate had fallen faster than anticipated. The kiwi tumbled to a six-year low of 64.99 U.S. cents on July 16, a week before Reserve Bank of New Zealand Governor Wheeler cut the main interest rate. That compares with strategists’ 65-cent median year-end forecast.
Wheeler, in announcing the policy move, omitted previous references to the New Zealand dollar’s level being unjustified and unsustainable, a key criteria for intervention. He did say further declines in its value were necessary for the economy.
“Central banks around the world have been waiting for the Fed to raise rates,” said Chris Chapman, a fixed-income trader at Manulife Asset Management in London. “The RBA and RBNZ have adjusted their comments” because they’ve seen “substantial declines this year and have probably reached levels they’re more comfortable with.”
For Australia and New Zealand, the negative impact of having a weaker currency is starting to overshadow the benefits, said Hideki Shibata, senior rates and currencies strategist at Tokai Tokyo Research Center.
“Currency depreciation is approaching its limit given the rising risk of weaker demand from overseas investors” for the nations’ securities, he said.
U.S. central bank head Janet Yellen has been increasingly explicit in recent months about the potential for higher rates as the recovery in the world’s largest economy gathers pace. Fed Bank of Atlanta President Dennis Lockhart said in an interview with the Wall Street Journal that the central bank is close to a September rate increase.
While West Shore’s Rickards says the Fed won’t raise borrowing costs from near zero this year, traders are pricing in about a 76 percent chance the Fed will act at or before the Fed’s December meeting. That’s based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase.
The yen has slumped 12 percent since the Bank of Japan last expanded its asset-purchase plan in October, and in June slid to a 13-year low of 125.86 to the dollar, weaker than the 125 median year-end forecast in Bloomberg’s survey. BOJ Governor Kuroda ruled out an expansion to bond purchases for now, even after the central bank trimmed its inflation forecasts.
“The prospective Fed rate hike will do a lot of the heavy lifting on these FX crosses,” said Grant Peterkin, a money manager at Lombard Odier Investment Managers in Geneva, which oversees about $170 billion. “They don’t need to be as explicit as they’ve been before.”