Reserve Bank governor Glenn Stevens got his wish yesterday when he moved the dollar – lower – by diverting from the prepared text in his first speech for two months.
But you’d argue that the Aussie dollar has been driven lower more by the rising turmoil in Egypt, which has seen the US dollar and oil prices rise sharply as nervy investors tried to find safe havens and abandoned risky investments (as Australia is seen offshore because of its dependence on commodities), rather than what Mr Stevens said in Brisbane.
And with the US having a short trading day overnight ahead of the Independence Day holiday tonight, and then the June jobs report on Friday night, many investors preferred to go for safety.
Mr Stevens’ off-the-cuff comments came around 1 pm, and helped send the dollar under 91 USc.
But the rising tensions in Egypt is doing more to send it lower as investors look for safety in US dollar assets. The currency has fallen nearly 3c from last Friday’s close of around 92.75c. It wastrading round 90.64 US cents in holiday-shortened US trading this morning.
Mr Stevens told a lunch in Brisbane yesterday that "As you may know, the Reserve Bank board in fact held its meeting here in Brisbane yesterday, at which we deliberated for a very long time, and then elected to sit with the cash rate unchanged".
The prepared speech had a shorter statement: "Yesterday the Board, at its monthly meeting, left the cash rate unchanged". And it continued "I don’t propose to comment about yesterday’s decision in particular, or to send any particular messages about the next decision". But he did… but he was trying to be humorous.
But when a short version of his comment, short of context, was moved by financial newswires such as Bloomberg and Reuters, the dollar fell – but don’t except the RBA to be upset, the episode achieved what the bank has been trying to do – force the Aussie dollar lower.
So down went the dollar and it added to the nervousness in the stock market which had already fallen by more than 1.6% before Mr Stevens made his lunchtime speech. It ended down 1.8%
It followed the 2.6% surge on Tuesday and the 1.6% fall on Monday and was just as hard to understand.
AUDUSD – Down, down, down as Egypt tensions hit markets
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While some commentary blamed Mr Steven’s handful of words for the market’s afternoon slide – other markets in Asia weakened as they reconsidered what was happening in the Chinese economy and the growing turmoil in Egypt which pushed the US dollar higher as nervy investors sort safe havens in the event of civil strife breaking out and oil movements and other trade through the Suez Canal being hit.
As well, world oil prices rose strongly – reaching new 14 month highs of more than $US101 for US standard crude. That’s up 7% since Monday. As a result the discount to Brent crude continues to narrow and is now around $US3 a barrel, the smallest for more than a year.
Adding to the impact of Mr Stevens’ unscripted comments were other references to the dollar’s value – and the way it has helped the Australian economy adjust to handle the boom and busts on global markets and in the global economy in the past six years.
Those comments are not new, nor are comments from Mr Stevens expressing surprise at the length of time the Aussie dollar has stayed above parity with the US dollar.
It has helped frustrate monetary policy and the RBA’s attempts to help smooth the economy’s transition from the mining investment boom to a more broad based growth pattern based on domestic activity such as home building and construction and household consumption.
And yesterday we saw hints of that with a much larger trade surplus for May (when the dollar started falling) of $670 million (the market forecast just $53 million), an 18 month high for new home sales for May, but weak retail sales data for April and May (but which look stronger if online sales and car sales are factored in).
"That said, the exchange rate was somewhat too high for a period. It is no secret that I, for one, have been surprised that the foreign exchange market has taken as long as it has to reflect the fact that the terms of trade peaked some time ago – nearly two years ago, in fact.
"In the end, though, market-based exchange rates do eventually adjust – and usually in a less disruptive way than those that are maintained artificially. A flexible exchange rate is an important part of adjustment over all phases of the cycle and it remains a major advantage that we have one. If the economy ‘needs’ a lower exchange rate, it will probably get it." Mr Stevens said.
Mr Stevens pointed out that the dollar may have been even higher against other currencies if not for the cautious behaviour of consumers and firms.
”Actually, the exchange rate might have been even higher but for the changes in behaviour by households, which have not returned to their earlier spending habits, instead maintaining a saving rate much more in line with longer-run historical norms,’‘ he said.
”Corporations have tended to have a reasonably conservative mindset too, putting an emphasis on reducing debt and maintaining high levels of liquidity.”
But as interesting as his comments and the market reaction has been, the way offshore markets are treating the problems in Egypt is having a greater influence on markets and the value of currencies such as the US and Australian dollars.
It will be interesting to see what Mr Phil Lowe, Mr Steven’s RBA Deputy Governor, has to say when he makes his first speech for a couple of months, in Sydney today.
