RBA Observer Update
Speech shows more concerns about high AUD
Deputy Governor Philip Lowe gave a speech tonight linking relatively high local rates with the high AUD. This comes after numbers last week showed the RBA accumulated more reserves than usual in the past two months. They appear more worried about the high currency. By articulating the rates/AUD link, while noting that inflation is on target, Lowe leaves the door open for a rate cut in response to the high AUD. We still expect another cut by year-end, maybe as soon as next week.
Facts
– Deputy Governor spoke tonight on the topic of ‘Australia and the World’ drawing particularly attention to Australia’s high relative interest rates and the support it may be giving to the AUD.
– He noted that ‘earlier in the year, growth in China was slowing, but the recent data have had a more positive tone and suggest that growth in China has stabilised, albeit at a lower rate than over the past decade or so’.
– He suggested that as a result of QE, ‘there is an incipient outflow of capital from these countries, and by extension downward pressure on their currencies. Of course, this means that the currencies of some other countries are under upward pressure, which, by itself, weighs on growth in these countries’.
– Specifically he noted that in ‘Canada, South Korea, Switzerland, New Zealand, and some of the Nordic countries’ … ‘rates are very low by historical standards, and in a number of them the central bank has recently drawn attention to the upward pressure on its currency’.
– While he suggested ‘the primary reason the Australian dollar is high compared with its historical average is the large shift in the relative price of commodities’ … portfolio flows were also important and had pushed local government bond ‘yields near historic lows’.
Implications
There is increasing evidence that the RBA is worried about the level of the AUD. This included an increase in reserve accumulation in the past two months that was apparent in statistics published last week. We see this as a form of ‘passive intervention’ as they are not targeting a specific level of the AUD, but the reserve accumulation is likely to be putting some downward pressure on the currency. We remain of the view that the RBA would be unlikely to intervene directly to target a level of the AUD. Rather, they may choose to use their cash rate setting to encourage the AUD to depreciate further. Tonight’s speech by Deputy Governor Philip Lowe was a bit more explicit than usual, by noting the link between rates, the currency and inflation. The direct reference to other central banks ‘drawing attention to their currencies’ despite low interest rates, seems to be a form of what is typical ‘RBA style’ jawboning from Lowe. The RBA seem to be building the case that they could consider further rate cuts to get the currency lower, albeit still consistent with their inflation targeting approach, and thus not a paradigm shift.
Bottom line
A speech by Deputy Governor Lowe drew and explicit link between Australia’s high relative interest rates and the high AUD. This seems to be leaving the door open for the RBA to respond to concerns about the high AUD, by cutting rates – albeit still consistent with the inflation targeting paradigm. We still expect another cut before year-end, probably next week.
HSBC
Global Research