RBA uneasy on high Aussie dollar

The RBA is much more uncomfortable about the Aussie than it has let on, says funds manager QIC.

The RBA might have been reluctant to articulate its aggravation. Picture: Adam Yip/The Australian.

Australia’s central bank is far more uneasy about the current high levels of the Australian dollar than it has let on, according to QIC, one of the country’s biggest government pension managers.

Trading at US77.00 cents late on Thursday, the Australian dollar may be as much as 10 per cent overvalued as measured by the Reserve Bank of Australia’s in-house economic modelling, a level sure to be “really tough” for exporters, said Katrina King, head of global liquid strategies at QIC.

“They haven’t been publicly articulating that, but we have a very similar model to them, and it’s very terms-of-trade related, and it’s way above value at the moment,” she said.

QIC has around $78 billion in funds under management.

The RBA might have been reluctant to articulate its aggravation, hoping instead the US Federal Reserve will soon set course for a near-term interest-rate increase and end its pain.

RBA Governor Glenn Stevens said this week the global economy is ready to absorb a rise in US interest rates.

“I can’t see why the global economy is really any less ready for No. 2 than it was for No. 1. It’s as ready as it has ever been in any of the other episodes,” he said in an interview.

But hopes for a US increase, which would lift the US dollar and help weaken the Australian dollar, have steadily faded in recent weeks.

Overnight, comments by the Fed suggested consideration of a rate rise could be drifting into next year. Investors have clear doubts about the Fed’s willingness to move again. Markets on Thursday put a 12 per cent probability on a Fed rate increase in September, 16 per cent on a move by November, and 48 per cent by December.

Ms King said a Fed increase now looks likely to be delayed until the first quarter of next year, providing scope for markets to confidently bid up the Australian dollar in the interim.

Her remarks come after both the National Australia Bank and the Commonwealth Bank warned this week that stubborn strength in the Australian dollar is likely to persist.

Australia needs a lower currency to support growth in exports, especially in the services sector, which is driving new hiring and investment as a downturn in mining continues to weigh on growth.

The central bank cut its official cash rate to a record low 1.5 per cent at the start of August, pointing to low inflation and the problem of high relative yield spreads.

Australia has some of the highest interest rates in the world at a time when negative rates have been adopted in places such as Europe and Japan.

On the outlook for interest rates in Australia, Ms King said she expects one further cut by the RBA, but doesn’t predict the central bank will join its global counterparts and deploy non-conventional policy tools.

“I see the probability of that as fairly low. I think it will need a hard landing in China,” Ms King said.

Still, the RBA has absorbed lessons from other central banks that have embraced such things as quantitative easing and negative rates to support their economies, she added. If the RBA starts down this road, the measures will likely start when the cash rate falls to 1.0 per cent.

But a QE scheme in Australia would struggle to gain momentum unless it comes with an expansion of the federal budget, allowing the RBA to buy up newly issued government bonds, she added.

Ms King cast doubts on whether the RBA would need to embrace negative rates, saying she doubted conditions in the economy would deteriorate to a point requiring such extreme measures.

- Dow Jones newswires