Reserve Bank stays mum on surging Australian dollar

The RBA made no mention in its policy statement of the rise in the dollar since its last board meeting on May 5.

Reserve Bank of Australia Governor Philip Lowe. Picture: AAP

The Reserve Bank has effectively given investors a green light to keep buying the Australian dollar.

The exchange rate didn’t rate a mention by the RBA in its monthly policy statement on Tuesday.

That was despite the fact that the Aussie dollar surged by 3.75 US cents, or almost 6 per cent, to a four-month high of US68.03c since the central bank’s last board meeting on May 5.

While the US dollar has fallen 1.8 per cent since then, the local currency has also risen 5.1 per cent against a trade-weighted basket of currencies monitored by the central bank.

Having bounced 24 per cent since the coronavirus-related selloff pushed it down by a massive 13 US cents to an 18-year low of US55.05c in March, the exchange rate — as one of the main transmission mechanisms of monetary policy — is now working against the economic recovery by making Australian exports more expensive.

“The RBA made no mention of Australian dollar,” noted Nomura interest rate strategist, Andrew Ticehurst. “We suggest that, if it had been materially concerned about the recent rebound in the exchange rate, it might have mentioned this today.”

Even with national accounts data for the March quarter expected to show the economy contracted 0.4 per cent on a quarter-on-quarter basis — setting the scene for a technical recession to be confirmed when extremely negative June quarter data are reported in September — the Australian dollar hasn’t risen enough to raise the ire of the Reserve Bank or influence the outlook for rates.

But the rising Aussie also suggests the global risk appetite is improving, which helps confidence.

“Some market participants were looking for the RBA to mention the Australian dollar, which has risen in the past couple of weeks, but there was no mention of the currency,” said HSBC chief economist, Paul Bloxham.

“Our view is that the RBA would see the rising exchange rate as consistent with the better-than-expected local economic performance, mitigating concerns they may have about it tightening financial conditions.”

If the economy avoids a negative March quarter of growth, expectations of a September quarter rebound would mean that Australia would extend its world-beating run without a recession — defined as two consecutive quarters of negative growth — to almost three decades.

It would also see Australia’s Q1 GDP print match the best-performing of the 20 advanced economies that have reported Q1 GDP so far, according to Deutsche Bank chief economist, Phil Odonaghoe. But while reiterating his observation last week that easing coronavirus infections and restrictions on movement meant “it is possible that the depth of the downturn will be less than earlier expected”, RBA governor Philip Lowe cautioned that “the Australian economy is going through a very difficult period and is experiencing the biggest economic contraction since the 1930s.”

Despite signs that hours worked stabilised in early May, and notwithstanding a pick-up in some forms of consumer spending, the outlook, including the nature and speed of the expected recovery, “remains highly uncertain and the pandemic is likely to have long-lasting effects on the economy”.

“In the period immediately ahead, much will depend on the confidence that people and businesses have about the health situation and their own finances,” Dr Lowe said. “The substantial, coordinated and unprecedented easing of fiscal and monetary policy in Australia is helping the economy through this difficult period.”

“It is likely that this fiscal and monetary support will be required for some time.”

Dr Lowe repeated that it will “do what it can” to support jobs, incomes and businesses and “make sure that Australia is well placed for the recovery.”

Its accommodative approach to monetary policy by keeping funding costs low and supporting the supply of credit to households and businesses “will be maintained as long as it is required” and the board “will not increase the cash rate target until progress is being made towards full employment and it is confident that inflation will be sustainably within the 2–3 per cent target band.”

Credit Suisse macro strategist, Damien Boey, said the RBA was “very wise to make fiscal and monetary co-ordination the key message of their statement.”

“In the first place, it highlights that with rates effectively at the zero bound, and officials unwilling to cut rates to negative levels, that fiscal policymakers bear the primary responsibility for counter-cyclical stimulus,” he said.

“Secondly, it shows that officials are very well aware of upcoming volatility in the credit impulse of the economy, in part because of fiscal fade, but in part, also because of uncertainty in the housing market and de-leveraging pressures therein.”

AMP Capital chief economist Shane Oliver said it was surprising there was no mention of the rebound in the value of the dollar since it was now where before the coronavirus crisis hit and well up from the low it hit at the height of the financial panic in March.

He said the rebound likely reflects a combination of “risk-on” as the dollar moves up with shares, perceptions that the local economy is doing better than the US, and the Fed’s QE program swamping the RBA’s bond buying, so the US dollar supply is surging relative to the supply of Australian dollar.

“Right now the RBA does not appear to be too concerned but the surge in the value of the dollar may become a problem for the RBA as it’s a de facto monetary tightening which could dampen the economic recovery,” Dr Oliver said. “While it may be tempting to think that the RBA should take interest rates negative to make the dollar less attractive and so pull its value down, our view is that this would be a mistake.

“Negative interest rates would just create confusion among the Australian public and there is little evidence that they have helped in Europe and Japan.

“ Dr Lowe has said on numerous occasions that negative interest rates are “extraordinarily unlikely” in Australia, and we think this will remain the case.

“Rather the preferred approach to providing more stimulus and to bring down the dollar ... would be via increased quantitative easing allied perhaps with the introduction of a ten-year bond yield target of, say, 0.5 per cent.”