Stevens Says RBA ‘Open Minded’ on FX Intervention

Reserve Bank of Australia Governor Glenn Stevens said that while the central bank has been unconvinced about the effectiveness of trying to drive down the Aussie, he remains “open-minded” on currency intervention.

“In this episode so far, the bank has not been convinced that large-scale intervention clearly passed the test of effectiveness versus cost,” Stevens said late yesterday in a speech to a forum of market economists to mark the approaching 30th anniversary of the free float of the exchange rate. “But that doesn’t mean we will always eschew intervention. In fact we remain open-minded on the issue.”

The Aussie is on track to match its longest run of weekly declines in seven years, fueled by Stevens’s remarks. The governor has sought to exert pressure on it by maintaining an easing bias, even as evidence mounts that record-low interest rates are stimulating housing.

It’s “an important declaration,” said Sally Auld, a Sydney-based interest-rate strategist at JPMorgan Chase & Co. The speech “suggests markets should probably give further consideration to the set of conditions that might push the RBA to reach deeper into its toolbox.”

The Aussie traded at 92.10 U.S. cents at 2:24 p.m. in Sydney, from 92.90 cents before the text of the speech was released late yesterday. It’s not far from the level it began trading at 30 years ago, as Stevens noted in the speech.

‘Right Circumstances’

In testimony in February, Stevens said the exchange rate would need to be “seriously overvalued” before considering moves to weaken it. He said yesterday, “our position has long been, and remains, that foreign exchange intervention can, judiciously used in the right circumstances, be effective.”

The Reserve Bank of Australia has cut rates by 2.25 percentage points in the past two years to 2.5 percent as it aims to boost industries outside resources that have been squeezed by the currency’s strength. Policy makers are trying to extend the nation’s 22-year stretch of economic expansion as a transition from mining investment to growth led by areas such as manufacturing is hampered by the currency’s resilience.

The RBA “could be leaning” against the Aussie already, Gareth Berry, a Singapore-based currency strategist at UBS AG, wrote in a note to clients yesterday, citing central bank foreign exchange transactions for October. They showed the bank had sold a net A$330 million ($295 million) worth of Australian dollars, “highly unusual” and the biggest unbalance in over four years, Berry said.

Currency Leaning

“This latest evidence now suggests that the RBA’s patience may be running out, and that the central bank may have finally begun to lean against the wind -- albeit very gently,” Berry wrote in the note, which was sent before Stevens’s speech.

Australia’s currency is about 10 percent overvalued, the International Monetary Fund said in a preliminary statement after reviewing the nation’s economy. While the RBA “has done a lot” with rate cuts since late 2011, it can’t engineer a depreciation of the currency, Brian Aitken, IMF mission chief, Asia and the Pacific Department, said in response to questions in Sydney on Nov. 20.

“In the end it is not possible to come to a definitive assessment on the extent of currency misalignment at the moment, on the basis of standard metrics,” Stevens said in yesterday’s speech. “Having said that, my judgment is that the Australian dollar is currently above levels we would expect to see in the medium term.”

The Aussie climbed almost 50 percent in the four years ended Dec. 31 as the nation escaped the 2009 global recession and a China-led mining investment boom spurred growth. That squeezed manufacturers and tourism operators in Australia’s southeast, spurring job cuts at companies such as Ford Motor Co.

Powerful Forces

“In evaluating the merits of intervention, the bank has been cognizant that the current episode is unlike the experience of the first twenty or twenty-five years of the float,” Stevens said yesterday. “Some very powerful forces have been at work.”

Those forces include the Federal Reserve’s unprecedented accommodation to stimulate the U.S. economy. The Aussie dropped Nov. 20 by the most in three months after minutes of the American central bank’s latest meeting signaled that $85 billion of monthly bond purchases could be reduced in the coming months.

‘Quite Irrational’

Stevens discussed the merits of intervention in testimony to Australian lawmakers early this year. “You need to be pretty confident that it’s seriously overvalued or that the market’s behaving in some quite irrational way before you would launch a large-scale intervention,” he said Feb. 22. “It’s somewhat too high, but we’re not talking 50 percent or something like that.”

The governor indicated in yesterday’s speech that the past might not serve as an accurate guide to future currency levels.

“Notwithstanding that, in my view, the Australian dollar is probably above its longer run equilibrium at present, it is far from clear that we can assume that the mean level we saw in the 1980s to the early 2000s will be the relevant one in the future,” he said.

The local dollar traded as low as 48 U.S. cents in 2001 and as high as $1.10 ten years later.

“For most of the floating era, until recently at least, a currency that seemed prone to weakness seemed more frequently a problem than the reverse,” Stevens said yesterday.

Elsewhere in the world, Malaysian inflation probably accelerated to 2.7 percent in October from 2.6 percent in the month prior, economists predicted before data today.

German business confidence probably advanced in November, with the Ifo institute’s index, based on a survey of 7,000 executives, rising to 107.7 from 107.4, economists projected.

In the U.S., job openings probably dropped to 3.84 million in September from 3.88 million a month earlier, a Bloomberg survey showed before a Labor Department report.

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