The Distillery: Dollar weight watchers

The local currency was on yet another downward spiral last week as Reserve Bank of Australia governor Glenn Stevens pushed ahead with attempts to talk the dollar down. Previous falls of such magnitude have been quickly followed by a recovery, though several commentators believe the currency may have found its right place and one scribe contends the RBA now has more firepower to keep it there.

Meanwhile, the government’s financial inquiry continues to drum up interest, with commentators continuing to ponder whether the appointment of David Murray was a shrewd one.

Elsewhere, a fresh poll has put the spotlight firmly on Prime Minister Tony Abbott. It appears his honeymoon period is over, with one commentator noticing that it comes as Labor’s Gillard/Rudd era officially ends.

First to the dollar, Fairfax’s Malcolm Maiden believes the Aussie is currently about its “right weight” even if it’s a little higher than what the RBA and trade-exposed industries would prefer.

The RBA has been pushing for a lower dollar for much of the year and Maiden contends Stevens now has the tools required to push it further down if he desires.

“There is not enough selling yet to get the currency down as far as the Reserve, the government and currency-exposed industries want, but there's enough to give a $A selling program more leverage. Stevens is signalling that if it wants to intervene, the Reserve should now get more bang for its buck. That changes the odds on intervention and the markets are right to take note.”

Still, Business Spectator’s Stephen Bartholomeusz notes that much of last week’s fall was due to expectations of an imminent taper from the Federal Reserve. Indeed, while the RBA may be showing willingness to intervene more readily in currency markets, it may have little impact.

“Apart from the costs of intervention …the RBA has been well aware that trying to stand against the tide of global capital flows is probably a fruitless exercise. The significance of external factors in the dollar’s trading value was evidenced this week when the US Federal Reserve Board’s Open Market Committee released the minutes of its most recent meeting. In the minutes, it said it might decide to slow the pace of its $US85 billion-a-month purchases of bonds and mortgages at one of its “next few meetings”. That sent a few shudders through markets and played the larger part in the sharp decline in the value of the Australian dollar this week..”

The smartest trade over the past month has been to sell the Australian currency just prior to Glenn Stevens speaking and then buy it back ahead of any speeches by incoming Fed chair Janet Yellen.

Anyone that has been following that strategy would have made a tidy profit of late, but you wouldn’t want to be on the wrong side of that trade if either of them changes direction in their commentary. Still, that doesn’t look likely anytime soon, particularly not with Stevens’ jawboning. And even though there have been signs of an imminent taper, nothing Yellen has said has indicated she is likely to change her dovish approach anytime soon.

The Australian Financial Review’s economics editor Alan Mitchell, meanwhile, says the dollar may have found its right place, with the rapid falls of earlier in the year unlikely to be repeated soon despite Stevens’ best jawboning efforts. Still, that’s no reason to be critical of the floating currency.

“There is no guarantee the dollar will be in any rush to repeat its depreciation of earlier this year, which the RBA says would accelerate the economy’s return to trend growth. But, as Stevens says, a floating dollar is better than the alternatives. And, as they look back at the way we stumbled through past booms and busts, most economists, and even some manufacturers, will agree that it has served the economy well.”

In politics, the appointment of former Commonwealth Bank boss David Murray to head a review of the financial sector raised eyebrows last week. While many scribes hit out at the development as it would potentially add a perception of bias, Terry McCrann, writing in The Australian, defends Murray, but can understand the criticism.

“There are two levels to this process. The inquiry and its recommendations; and then the full or partial implementation. The logical outcome of his inquiry must in the broad be to either strengthen the existing banking dominance, or at least not to weaken it to any significant degree. It will be all too easy to paint that as an "insider's job".”

So while Murray might be the best man for the job, he could also be the cause of plenty of public backlash.

The AFR’s Andrew Cornell, meanwhile, took the opportunity of his last column for the paper to discuss the direction of the inquiry. The broad scope presents many opportunities; not least it should show that we are largely on the right track.

“Australia came through the 2008 financial crisis remarkably well and while there is debate as to how much credit is due to fiscal stimulus, to the luck of Chinese stimulus, to good management, it is undoubtedly the case that our regulatory structures – thanks in no small part to the wake-up call of the HIH collapse and the recession of the early 90s – had the necessary resilience. This inquiry is an opportunity to provide an account of that success.”

Also in politics, news of Labor hitting the lead in the latest polls on a two party preferred basis has the AFR’s Geoff Kitney hinting it may be a turning point for the ALP. With both Julia Gillard and Kevin Rudd exiting stage left, Labor is winning back the faith of the Australian public. It’s amazing what a short stint of stability can do for perceptions.

Kitney’s colleague, Laura Tingle, believes the poll will come as a “rude shock” for the Abbott government as voters question whether the government is actually achieving anything.

The polls aren’t the only problem for Abbott, with the Sydney Morning Herald’seconomics editor Ross Gittins noting that the Coalition needs to find some tough cuts to expenses or risk being judged a failure on budget management.

In company news, David Jones received a strike on executive pay, as expected, in a backlash against several recent errors of judgment. So bad have things been that The Australian’s Blair Speedy mounts a case for a board spill to ensure real change took place at the retailer. Still, given the rare examples of directors getting voted out, don’t expect that anytime soon, Speedy’s colleague John Durie explains.

Indeed, it appears few shareholders are willing to go any further than the issuance of a warning to the board via a remuneration report strike. The whole process may be flawed, Durie contends.

Elsewhere, Fairfax’s Michael West looks into a shareholder revolution of a different kind – via activist funds. And the swell in activism could just be the beginning.

Finally, The Australian’s Rowan Callick delves further into the trade repercussions of Abbott’s row with Indonesia, while colleague David Uren pours cold water on any thought the Chinese and Indian economies can maintain their current growth rates. A Harvard study suggests continued high growth rates have proven impossible over time and a fall back to low growth would have severe consequences for the global economy.