Should central banks pay more than lip service to domestic rebalancing?
The RBA decision overnight probably lacked the suspense of the ECB. However, one measure which unites both central banks is the role of currency strength in policy execution. Yet, deflation matters aside, we believe there is a clear divergence in terms of what central banks would like to see in the role FX can play in domestic rebalancing. For the Eurozone, generating demand in the ‘core’ which could boost the finances of the periphery is an FX-neutral process – but a weaker euro can help the corporate outlook all the same. In Sydney (and elsewhere), a current account deficit will need a weaker FX to help finance. In G10, it looks like such policies only work at extremes.
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