Yes, it’s true. If the Reserve Bank of Australia wants a lower currency, then the smartest thing it could do -- right now -- is hike rates. Instead, the press release we saw after the board’s decision on Tuesday maintains the current exchange rate as a reason for more cuts.
“The exchange rate remains high by historical standards, particularly given the declines in key commodity prices, and hence is offering less assistance than it might in achieving balanced growth in the economy.” That is the stuff of fiction by the way, as the Aussie dollar is well undervalued with the terms of trade where it is. But, the board is clearly still watching it.
Probably more so after yesterday’s spike in the unemployment rate, although with sample rotation and seasonal analysis problems -- not to mention the ongoing strength in full-time employment growth -- you simply can’t read anything into yesterday’s numbers. Noting that, the RBA board will still probably read that spike in unemployment as further proof that the Aussie is too high. It would only take a "hobbit’s fart" -- to quote our own Rob Burgess -- to spook them into cutting again, notwithstanding the consensus expectation that the next move will be up. Either way, policymakers have a choice: Global rates are going up, this we know, and the RBA can either choose to lead that cycle or they can lag it. I would argue that regardless of what the unemployment rate does leading the cycle will confer on Australia considerable tactical advantages if it’s serious about the currency over the long term.
To see this, take a look at New Zealand’s experience. The Reserve Bank of New Zealand has hiked rates four times in four months -- a full percentage point to 3.5 per cent -- and the currency has done little. Indeed it’s one of the more remarkable features of its tightening cycle to date -- just how stable the kiwi has been. Against the US dollar, the kiwi is virtually unchanged from March, when it started tightening, at US84.6c. Going back to the start of the year it’s not much worse, maybe 2c higher or so and only 3 and a bit cents higher compared to the average exchange rate since 2011.
That’s a good omen for Australia if the RBA - and hey look, I’m just throwing this out there - wanted to position itself better for 1) a housing market that’s booming and 2) inflation that’s already at the top of the band. Maybe it wouldn’t hurt that much.
But why do it at all? The unemployment rate is skyrocketing! Well, because on current trends, the RBNZ will largely be done tightening by the time Janet Yellen has a big stretch and a yawn, and decides that a depression isn’t what she should be worrying about after all. You know, with millions of jobs being created every year, a plunging unemployment rate and rising inflation. Most forecasters expect this moment of clarity to occur between mid to late 2015. By that stage, and using the RBNZ’s own 90-day bank bill forecasts, the RBNZ will only have two to three more rate hikes left -- and that’s spread out over the ensuing two years (ie out to 2017 and beyond). Over that period, the Fed’s expected to hike maybe 200bps.
We can’t pretend we’re not in a currency war. We are. By hiking now, the RBNZ is playing it smart -- more so because the kiwi hasn’t done anything. When the Fed does finally get around to normalising rates, the New Zealand will likely see its currency weaken -- and on a permanent basis. This is clearly a better path than tightening after the Fed: establishing a new ‘equilibrium’ for your currency as it depreciates, rather than appreciates -- or hovers at a high level. I’ve always admired New Zealand policymakers for being considerably smarter than their Australian counterparts -- New Zealand’s even running a budget surplus! The question for the RBA, Treasury and ultimately the government is where do they want to be left standing when the music stops?