RBA Aussie Jawboning In Spotlight as U.S. Expressed Concern

  • U.S. made comments in September as part of IMF consultations
  • Aussie climbs Tuesday after Stevens positive on economy

The Australian central bank’s attempts to talk the local currency lower last year ran afoul of the U.S. Treasury, which chided officials by reminding them of their commitment to a freely floating exchange rate.

The U.S. “expressed concern over the authorities’ public statements on the desired direction of the exchange rate,” during consultations with the International Monetary Fund over Australia in September, it said Monday in Washington. In August, the Reserve Bank of Australia’s monthly policy statement modified its exchange-rate language. After saying currency “depreciation seems both likely and necessary,” in July, Governor Glenn Stevens said the following month, “the Australian dollar is adjusting to the significant declines in key commodity prices.” He said Tuesday Australia has a floating currency.

The RBA consistently said in recent years that Australia’s dollar was stronger than warranted considering the collapse in prices for commodity exports. It had said the currency crimped efforts to boost services industries and make up for the collapse in mining investment. Officials cited strong demand for the higher yields offered by Australia’s government bonds -- as central banks in Japan, Europe and the U.S. cut interest rates toward zero and carried out massive asset purchases -- as a driver of the exchange rate’s resilience.

“Every country at the moment typically wants a lower exchange rate,” said Richard Grace, chief currency and rates strategist at Commonwealth Bank of Australia in Sydney. “If a central bank says the exchange rate should be lower based on fundamentals then they’re not breaching any guidelines according to the IMF or the U.S. Treasury. When they step out of that, I guess this is why Australia has been pin-pointed.”

The RBA runs “normal” monetary policy and the Australian dollar is a floating currency, Stevens said on Tuesday in response to a question after a speech.

“Occasionally we have an opinion about a market price, which is not that unknown in central banking circles,” he said.

RBA’s Opinions

The Aussie climbed 0.5 percent to 76.16 U.S. cents at 5:20 p.m. in Sydney. The currency has climbed more than 6 percent this month and 11 percent from a near seven-year low reached in January.

Stevens in his speech said the economy is “adjusting quite well” to lower commodity prices and has more fiscal and policy scope to respond to a global downturn than most countries.

The Australian central bank’s August statement was the first time in more than a year that the rate announcement didn’t indicate further currency depreciation might be warranted. It sparked a surge in the Aussie.

The report on the actions of the U.S. Treasury and the Office of the U.S. Executive Director (OUSED) may point to why RBA officials have since tempered their language on the Australian dollar.

The Australian government declined to comment on the matter Tuesday when contacted.

In his annual interview with the Australian Financial Review published Dec. 16, Stevens declined to nominate a preferred level for the currency, merely noting that the foreign-exchange rate was adjusting and further moves were possible on the back of commodity price declines. The Aussie ended last year at 72.86 U.S. cents after falling 11 percent.

Back in December 2013, when the currency 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.

U.S. Concerned

“In a September 2015 Board statement on Australia’s Article IV, the OUSED expressed concern over the authorities’ public statements on the desired direction of the exchange rate,” according to the Treasury statement. “The OUSED urged the authorities to avoid statements that could be perceived as inconsistent with their international commitment to a market-determined exchange rate.”

The change in tone may have been in response to the U.S. concerns, said CBA’s Grace. The report “has potentially broader implications” for central bankers in Europe, Japan and New Zealand, “who have also used such tactics to lower their currency in the past,” he said.

When asked about recent gains RBA Deputy Governor Philip Lowe said this month that like most of his global peers, he’d welcome a weaker currency to help with rebalancing the local economy. Assistant Governor Guy Debelle echoed his comments a few days later.

“If there is some sort of understanding that ‘Thou shall not talk down thy currency!’ I could argue that the RBA is probably about the only central bank that’s honored that commitment,” said Ray Attrill, co-head of currency strategy at National Australia Bank Ltd. in Sydney. “The U.S. has been as guilty as anybody in saying or doing things with the intention of weakening the currency.”

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