Market primed for dollar’s fall

DEBELLE’S speech may achieve the RBA board’s wish.

Guy Debelle, RBA's Assistant Governor financial markets.

YESTERDAY’S speech by Reserve Bank assistant governor Guy Debelle has helped provide the federal government with some much needed jawboning to push the dollar down.

The minutes of the RBA’s May 6 board meeting, released yesterday, show it has no plans to change the official cash rate any time soon from its present low rate of 2.5 per cent.

The minutes show the board believes that “the current accommodative stance of policy (is) likely to be appropriate for some time yet”.

But, by carefully dissecting all the forces affecting capital inflows into Australia, which he concludes will reduce the demand for Australian dollars, Debelle’s speech provides plenty of comfort for those seeking to help the economy by lowering the dollar.

Debelle’s speech itself doesn’t contain any shocks.

It is already clear, for example, that Australian banks have cut their reliance on offshore borrowing, having been given a serious fright when the international markets went into shock in the wake of the global financial crisis and the years after.

We already know that the big capital investment phase for the mining boom is coming to an end, which in turn means the level of investment coming into the country to finance it can be expected to fall.

But, coming at a time of falling consumer confidence in the wake of the budget, Debelle’s argument that demand for the dollar could be expected to fall in the foreseeable future does what the board itself cannot do.

It conditions the market for a much needed fall in the currency, which Debelle notes “would help in achieving balanced growth in the economy”.

The official minutes provide no indication of the board’s view on the price of the dollar.

There are no references to the dollar being “uncomfortably high”.

If anything they show a board that seems fairly pleased about the collective economic outlook.

It is not too worried about the slowdown in the Chinese economy, points to rising levels of exports of iron ore and coal, “moderate growth” in the US economy, an increase in the pace of economic activity in Australia during the past six months and a strong growth in investment in housing.

The board believes that the economy can expect to shift from below trend growth this year to above trend next financial year.

But those comments were written two weeks ago before the budget and its negative public reception. More information on the state of consumer confidence will be released today by Westpac with economists expecting a double-digit fall in the figures.

As JPMorgan economist Stephen Walters noted yesterday, “indications are the reaction (to the budget) is pretty ugly”.

In this context, Debelle’s speech and its collective tone was important. In total, it was nine pages of detailed argument about why the dollar could be expected to fall — at least as far as its level is shaped by capital inflows.

Debelle was quick to add the caveat that “the ability of economists to forecast exchange rate movements is notoriously poor”.

But, of course, Debelle is more than just a humble economist and nothing that comes out of Martin Place does so by accident. There was a clear message being delivered with a force that might have been a step too far for the RBA governor himself.

In addition to the obvious factors — the drop in banks’ offshore borrowings and expected fall in capital investment in the mining boom — Debelle also argued that the big increase in foreign holdings of Australian paper, particularly Australian government debt, which took place in the years following the GFC may well be over.

He’s not expecting it to fall any time soon but this third factor, which has helped to hold up the dollar in recent years (including new investments by foreign sovereign wealth funds), may have at least peaked.

So get your overseas holiday in soon.