Stevens Gets Aussie Christmas Wish as Westpac Sees Jawboning End

  • RBA Governor declines to nominate weaker level for currency
  • Aussie set for steepest two-week drop since September on Fed

For the first time in years Glenn Stevens probably won’t be asking for a weaker Australian dollar for Christmas.

With the Federal Open Market Committee raising interest rates last week for the first time in almost a decade, the Reserve Bank of Australia Governor is getting the help he needs in holding down the Aussie. It was at 71.67 U.S. cents as of 5 p.m. on Monday in Sydney, having dropped for both of the past two weeks. In contrast to years gone by, Stevens this month declined to nominate a preferred level for the currency in a media interview before the holiday break.

The boost from a weaker currency is increasingly important for Australia’s economy as sliding commodity prices hurt corporate and government revenues at a time when the RBA is seen by some analysts as reluctant to lower its benchmark rate from a record low. The currency’s 31 percent depreciation over the past three years has already helped to boost sectors from manufacturing to tourism and education, underpinning jobs growth that has pushed the unemployment rate down to 5.8 percent from a January peak of 6.4 percent.

“I suspect Governor Stevens will be quietly pleased to see the fall in the Aussie after the FOMC, given how many times he must have been warned that the hike was factored into the Aussie already,” said Sean Callow, a foreign-exchange strategist in Sydney at Westpac Banking Corp. “It seems the period of jawboning is behind us. He seems willing to trust the markets to resume selling Aussie if commodities remain weak.”

The Australian dollar has dropped 35 percent since reaching a record high of $1.1081 in 2011. Having declined 12 percent since Dec. 31, it is poised for a third-straight year of weakness after defying analysts in the period following the 2008 global financial crisis.

That strength, which came on the heels of a record commodities boom for Australia, was sustained even as mining investment started declining and the economy slowed. The RBA started easing policy in November 2011 and has reduced its benchmark 2.75 percentage points to an unprecedented 2 percent since, with its most-recent cut coming in May this year.

Narrower Premium

Tighter U.S. policy has helped shrink the yield premium on Australian debt, making such holdings less attractive. Two-year Aussie notes offered 105 basis points more than similar-dated Treasuries, compared with an average of 257 over the past decade.

Back in December 2013, when the Aussie was trading near 90 cents, Stevens said that a level of about 85 U.S. cents “would be closer to the mark” than 95 cents. Toward the end of 2014, with the local dollar above 80 cents, he said about 75 cents would be better than 85. 

One year on, the central bank chief declined in his annual interview with the Australian Financial Review published Dec. 16 to nominate any particular level, merely noting that the foreign-exchange rate was adjusting and further moves were possible on the back of commodity price declines. Later that day, the Federal Reserve increased its benchmark rate for the first time since 2006, pushing the Aussie to a one-month low.

Adding weight on the currency has been a 29 percent slide this quarter in the price of iron ore, Australia’s chief commodity export.

The Aussie will continue to be pressured lower by a strong U.S. currency and lower commodity prices, according to Commonwealth Bank of Australia, the nation’s largest lender. Deutsche Bank AG predicts that the currency will fall to 60 cents by end-2016 and trough at 58 the following year. The median of estimates compiled by Bloomberg is for it to fall to a low of 68 cents in the September quarter of 2016.

“Stevens has gone a little quiet on the Aussie, but I think he would be happy it is falling and would be hoping for further weakness,” said Joseph Capurso, a strategist at Commonwealth Bank of Australia in Sydney. “I can see Aussie falling to 67 to 69 cents in the first half of 2016.”

Before it's here, it's on the Bloomberg Terminal.