After the Reserve Bank of Australia’s minutes yesterday the Aussie dollar put on about 20 pips on the view that the statement was less dovish. Traders in Europe and the US last night added on another 40 pips and the unit sits at 0.9419 as I write.
Now, I’m not entirely sure the market’s interpretation of the RBA minutes is right. I hope it is, but the problem is economic policy is so opaque at the moment – the exchange rate target was never really announced, so the market was left to deduce that the currency was the target and will still be left to deduce when the central bank stops targeting it.
This is no good thing. All we know is that the Reserve Bank is still of the mistaken view that the exchange rate is too high. This is wrong – and readers should note that no evidence of this exists. How is it ‘too high’? Growth is sub-trend, sure. But why is growth sub-trend? Do they think a lower exchange rate will lift consumer spending? How will it lift non-mining investment? How will a lower Australian dollar help the housing industry?
It won’t, obviously. In fact it, would hurt on every single point. This is why the Reserve Bank’s statements on the Australian dollar are wrong. More than wrong, they are dangerous.
I’d draw your attention to the great interview the KGB did with Professor Ross Garnaut yesterday. It’s a very interesting read, but I respectfully disagree with Garnaut on nearly every single point. What struck me most – and this is a general observation for those who want a lower dollar – is that no evidence is ever presented as to where the damage is being done exactly, and how the country would benefit. Anecdotes certainly don’t count when it comes to serious policy analysis – that simply degenerates into a tit for tat ‘he said she said’. The fact is, export growth is already strong even with our ‘overvalued’ dollar.
So what are the Reserve Bank and Garnaut hoping for exactly? It is merely assumed that a weaker currency would be great, and this isn’t correct in every circumstance. It’s a fairly serious deficiency, especially from the central bank, to fail in making the case as to how a lower exchange rate would benefit – in net terms – when export growth is already strong and when it won’t help lift consumer spending, non-mining investment or housing.
It would in fact be an unmitigated disaster if we had a currency around the 60 cent mark, as Garnaut suggests, and the fact that there are so many policy contradictions around that point should alert people to the inherent flaws of these statements. This is very dangerous talk.
Anyway, back to the price action! The Australian dollar did push a little higher overnight as mentioned, while currency action elsewhere was non-descript. The euro was 20 pips or so higher at 1.3530 and the yen is at 100.2. There wasn’t much to be said on rates – the US 10-year yield was up 1 bps or so to 2.7 per cent.
Turning to global equities, markets dipped a bit, more so in Europe with the S&P500 only off 0.2 per cent (1788) at the time of writing. The Dow was then flat (15,974) while the Nasdaq was down 0.5 per cent (3931). Not much that I could see that was driving action – utilities, industrials and tech were the key under-performers – there was no data to speak of and it could be the case that punters are waiting to see what Fed chairman Ben Bernanke has to say this morning when he speaks at 1100 AEDT.
I’m a bit surprised at the extent of the sell-off in Europe to be honest. The Dax was down 0.4 per cent, the CaC off 1.1 per cent and the FTSE100 fell 0.4 per cent. But this is on the back of some decent economic data from the ZEW survey. The German ZEW sentiment index rose to 54.6 in November from 52.8 – a modest increase perhaps but it’s well above the average of 24 and the highest level in four years. The sentiment index for the eurozone as a whole is at its highest since 2006!
Outside of that there wasn’t much. For the remaining price action, commodities posted very modest gains with gold up smalls ($1274), copper up 0.2 per cent and crude was 0.3 per cent higher on West Texas Intermediate ($93.35) and down 1.1 per cent on Brent ($106.9). News flow wise there wasn’t much.
For our market today it should be quiet unless Bernanke says something amazing. In the absence of that, the SPI points to a 0.5 per cent fall, and there’s not much news or dataflow otherwise for our session. Tonight it’s busy though. US retail sales take centre stage and we also see US consumer price inflation data, existing home sales and business inventories.
Have a great day…
Adam Carr is a leading market economist.
Follow @AdamCarrEcon on Twitter.