Photographer: Brent Lewin/Bloomberg

Why the RBA Is Keeping Quiet on the Aussie

  • Aussie holds gain as Stevens says it's `a bit ahead of itself'
  • `The RBA's easing bias is fairly mild,' says Westpac's Callow

The Australian central bank’s reluctance to chastise traders as the Aussie dollar rallied as much as 12 percent from its January low is as much about an improving economy as it is about staying out of currency wars.

Governor Glenn Stevens tempered his language on Australian dollar strength in the second half of 2015 as it weakened in line with commodities and American officials chided the RBA for flagging its “desired direction” for a floating exchange rate. This week, Stevens offered only that the currency “might be getting a bit ahead of itself,” while brushing aside U.S. criticism in reserving the right to comment on whether or not it is undervalued or overvalued.

“Jawboning the currency isn’t likely to have a sustained impact if not backed by either rate cut or intervention threats,” said Sean Callow, a senior foreign-exchange strategist in Sydney at Westpac Banking Corp. “The RBA’s easing bias is fairly mild and focused more on domestic demand prospects and Stevens sounded proud of the absence of RBA intervention in recent years, so that’s even less of a threat.”

‘Normal’ Policy

Policy makers have expressed a reluctance to lower interest rates since its last move down in May and Stevens on Tuesday said the economy is “adjusting quite well” to lower commodity prices, making the RBA somewhat complicit in the Aussie’s rebound. Australia’s 2 percent cash rate stands in contrast to Japan and Europe, where central banks have engaged in asset-purchase programs and adopted negative rates.

The central bank chief said this week that the RBA runs “normal” monetary policy and hasn’t intervened in markets during a period when the local currency has traded as high as $1.1081 in 2011 and been less responsive to falling commodity prices. “Occasionally we have an opinion about a market price, which is not that unknown in central banking circles,” he said.

The Australian dollar was at 75.21 U.S. cents as of 11:30 a.m. on Thursday in Sydney, having bounced back from an almost seven-year low of 68.27 touched Jan. 15.

Stevens’s comments on Tuesday suggest there is no practical change in the RBA’s approach to the currency, according to Callow. 

The following charts look at Australia’s export prices and gains in the currency, the impact of changing rate expectations from the RBA and Federal Reserve, and the South Pacific nation’s yield advantage.

CHART 1: The recent appreciation in the Australian dollar reflects a recovery
in the price of exports versus imports, the so-called terms of trade.

CHART 2: The RBA’s apparent reluctance to cut its benchmark any further has combined with reduced expectations for Federal Reserve policy tightening to preserve a gap between Australian and U.S. interest-rate expectations. Swaps data compiled by Bloomberg show that the market is pricing in a cash-target differential of 1.1 percentage points a year from now.

CHART 3: Australian sovereign yields for debt due in a year climbed above the 2 percent cash rate this month for the first time since mid-January, taking the entire yield curve above the cash rate. Yields have climbed as stability in equity and commodity markets combined with improved prospects for higher U.S. rate increases. The yield premium for two-year Australian securities over U.S. notes of comparable maturity was at 1.11 percentage points, while for German bunds it was 2.45. 

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