Consistent with the laid-back cultural dynamic that so
distinguishes the national character, the Reserve Bank of Australia
appears to be perfectly happy with its extremely strong currency.
In a
speech
delivered earlier today, RBA Deputy Governor Lowe claimed that "it
is difficult to make a strong case that the exchange rate is
fundamentally misaligned," because it is essentially consistent
with the "boom" -- the relationship between export and import
prices in terms of trade. As a result, Lowe contends that "the
hurdle for intervention is quite high". For international investors
and traders, this hands-off attitude towards the Australian dollar
(FXA, quote) is a major attraction. In the major advanced
economies, central bankers have been deliberately
debasing
their currencies for some time. Moreover, some have been prepared
to
undertake massive intervention
to prevent additional currency strength. Even better for those
looking for some yield, the Aussie again found itself under
pressure overnight as Q4 GDP data came out much weaker than
expected. The Australian economy expanded at a quarter-to-quarter
rate of 0.4%, compared to expectations of 0.8%. The previous
quarter was also revised lower. The data showed Australian
household consumption rising at the slowest pace for nearly two
years. Meanwhile, the softer housing market saw a sharp fall in
housing construction, which took 0.2% from the headline rise in
GDP. This is not that much of a surprise, given the pull-back in
house prices seen so far this year. One of the main implications of
this data is that it is the domestic economy that appears weak. Net
exports improving marginally in the quarter. So, for now at least,
the fear that Australia is "vulnerable" because of its dependence
on raw material exports to the rest of Asia (particularly China)
may be secondary to concerns over the domestic economy. In a
similar vein, the data remind us that Australia is more than a
proxy for China and there is no doubt that the chances of an RBA
rate cut in one of the two upcoming meetings has increased.
This will further undermine the Aussie's yield premium over many of
the funding currencies, such as the yen, euro and U.S. dollars.
Indeed, given what we have seen on the other
high yielders
over the past week (Brazil, Kiwi, Turkey), this has been the worst
week for carry trades so far this year. A simple basket of the four
"yield" currencies funded via yen or Swiss francs is down nearly 2%
since Friday, having gained nearly 10% so far this year. But as we
saw with weak Brazilian GDP yesterday, the macro moves are not just
driven by global risk appetite, but domestic factors as well. by
Simon Watkins for
Emerging Money