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Reserve Bank under pressure to lower the Australian dollar

Sue Lannin reported this story on Tuesday, December 11, 2012 18:10:00

MARK COLVIN: Optimism among Australian companies has reached its lowest in more than three years.

The latest survey by the National Australia Bank found that business confidence and trading conditions were weak in November.

Profits fell and future orders dropped to the lowest level in about three-and-a-half years.

For many companies, the high Australian dollar is eating into earnings.

So should the Reserve Bank intervene to lower the value of the currency?

Here's finance reporter, Sue Lannin.

SUE LANNIN: Australia's mining boom is coming off the boil and that's one of the factors affecting business confidence and conditions, according to the National Australia Bank.

Rob Brooker is the bank's head of Australian economics.

ROB BROOKER: Fairly broad based decline in business confidence. This is the lowest reading on business confidence we've had since April 2009.

SUE LANNIN: The NAB's survey of 600 firms found business confidence fell to minus nine in November.

Business conditions remained at minus five for the second month in a row.

Rob Brooker again.

ROB BROOKER: Certainly the US elections were over but that kind of led to an increased concern about the fiscal cliff and I think too we saw some retracing of commodity prices.

Also, if you have a look at the survey, forward orders deteriorated as well.

SUE LANNIN: The survey found the weak global economy and high Australian dollar are also weighing on local companies.

The local currency has been at parity with the US dollar for more than two years, hurting industries like tourism and manufacturing.

So should the Reserve Bank intervene to lower the dollar by say printing more money or selling the currency en masse?

RBA deputy governor, Philip Lowe, said intervention couldn't be rule out when asked about it at an economist's dinner last week.

PHILIP LOWE: I can understand why the Australian dollar is high but it is uncomfortable.

The floating exchange rate regime has served us very well. We wouldn't rule out intervention but it would be a very significant step to take and quite a departure from the set of arrangements that have served us so well for so long now.

SUE LANNIN: JP Morgan interest rate strategist, Sally Auld, thinks intervention is unlikely but if it happened it could take several forms.

SALLY AULD: First port of call would be more rates cuts but I think there probably comes a point where you acknowledge that rates cuts have diminishing returns and it's probably at that point when you start to consider alternative policies.

So, I guess the most simplest form of foreign exchange intervention is literally just selling Australian dollars and buying other currencies against that.

So what would really happen would be that the RBA's foreign exchange reserves, the holdings of other currencies would grow quite dramatically.

SUE LANNIN: And as you said, that would be an unconventional approach but we see constantly, for example Hong Kong, the bastion of free markets intervening to defend its peg with the US dollar.

So, it wouldn't be without precedent would it if the Reserve Bank were to sell Australian dollars?

SALLY AULD: Yeah that's certainly right. I mean a number of other central banks or monetary authorities that are intervening in currency markets and a number of the Asian central banks, including Hong Kong, do that and obviously the Swiss central bank is doing that at the moment.

So, in some respects, that's what increases the allure of the Australian dollar at the moment because investors know that it's a market where there's a great degree of reluctance to intervene and from an investor's point of view that's actually a good thing. You know, you want free markets that move on supply and demand fundamentals.

SUE LANNIN: Commonwealth Bank chief currency strategist, Richard Grace, thinks dollar invention would harm the economy by driving up inflation.

RICHARD GRACE: So if you intervene and you push down the value of the Australian dollar, what happens is imported inflation goes up, so total headline inflation goes up, and that's very distortionary for the Australian economy.

The equity market would suffer under a period of foreign inflation. All sorts of business investment decisions would suffer under a period of high inflation and you'd effectively risk giving up the hard won gains you've made on inflation that you've achieved over the last decade or two.

So, it's, I don't think the environment or the argument can be made for the RBA to seriously push, to intervene to push down the value of the Australian dollar.

MARK COLVIN: The Commonwealth Bank chief currency strategist, Richard Grace, ending Sue Lannin's report.

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