'Perverse strength' in the Australian dollar will not prompt the RBA to act on foreign exchange markets

Details

Category: Australian Dollar News

Written by Will Peters

International Money Transfers at our sister site here

"We doubt that the RBA is currently minded to become the South Pacific counterpart of the Swiss National Bank" - Bank of America Merrill Lynch Global Research.

The Australian dollar (Currency:AUD) continues to be the star outperformed in the global foreign exchange space - the Australian currency is virtually unchanged against the USD since August last year, and up by some US 8 and-a-half cents from its most recent low at the beginning of June.

This despite falling commodity prices and a deteriorating global macro-economic landscape.


"This seemingly perverse strength in the AUD has been widely attributed to continued buying of AUD-denominated paper by central banks and sovereign wealth funds seeking to diversify out of USD and euros into other “safe haven” assets, of which Australian Government (and more recently, State Government) bonds have been viewed as among a diminishing number," says a currency note from Bank of America Merrill Lynch Global Research.

The problem though is that the strong currency is pricing Australian exports out of the global market place, with growing talk of a two-speed Australian economy.

But, will the Reserve Bank of Australia act to keep the exchange rate capped like the Swiss central bank has done? Indeed, it is argued that with the economic data-flow coming out of Australia remaining robust, the only factor which might conceivably argue for consideration of a rate cut at this week’s Board meeting is the persistent strength of the AUD.

But, this is cut is not likely argue Bank of America:

"We doubt that the RBA is currently minded to become the South Pacific counterpart of the Swiss National Bank, and be prepared to intervene without limit to prevent the AUD from appreciating above some chosen level.

"Australia, unlike Switzerland, is (still) experiencing the largest commodities boom in its history, and even though commodity prices appear to have peaked, and it may be that the peak in resources-related investment is not far away, the mining sector is still likely to expand further as a share of GDP as resources projects enter their full production phase. Australia’s experiences of previous “commodities booms,” under fixed exchange rate regimes, which have always ended with bursts of double-digit inflation, are likely to discourage the RBA from seeking to “fix” the exchange rate now.

"And if cutting rates by 125bp has not stopped the AUD from appreciating, it seems improbable that another 25bp or 50bp would have any different outcome.

"As a result, we expect the RBA Board to leave the cash rate on hold at this week’s meeting, and continue to look to the November meeting (after the release of the 3Q CPI data, and after what we expect will be several months of rising unemployment) as the most likely timing for the next cut in the cash rate."