The Aussie dollar dive may have been part of Glenn Stevens' RBA script, not lower mortgage rates

Larry SchlesingerDecember 7, 2020

Yesterday, around lunchtime, the Australian dollar fell more than one cent to 90.6 cents after RBA governor Glenn Stevens let it slip that the decision to leave the cash rate on hold at 2.75% was a close-call.

The expectation among nearly all economists was that the decision to leave rates on hold was a relatively straightforward one - for once.

Instead Stevens said, as part of unscripted opening remarks at a Brisbane luncheon, that the RBA board had “deliberated for a very long time and then elected to sit with the cash rate unchanged”.

The official transcript on the RBA website has Stevens as saying:

“I don't propose to comment about yesterday's (July 2) decision in particular, or to send any particular messages about the next decision.”

Fairfax business and economics commentator Malcolm Maiden speculates that the “feverish market reaction” driven by a newsflash sent out by Bloomberg about Stevens' unscripted remarks reveals that overseas investors, who have invested without currency hedges, are very nervous about the dollar falling.

The unscripted comments made by Stevens could perhaps have been interpreted by overseas investors as meaning that it won’t take much for the RBA to cut the cash rate, which would send the Australian dollar falling even further.

But as Maiden points out, while the fall in the Australian dollar was triggered by “cash rate speculation” the very fact that it has fallen may work against the RBA needing to actually cut the cash rate when it next meets in August.

This link was clearly spelled out by HSBC chief economist Paul Bloxham at the end of May when he said  that the recent depreciation of the dollar has had the effect of adding to 0.1% to Australia’s GDP – “which is around the same as the estimated effect of a 25 basis point rate cut”.

So it is more than likely that Stevens, a clearly very prudent man, knew exactly what he was doing when he made his off the cuff remarks, that is:

Push down the dollar without a rate cut and leave further room for the RBA to move should global economic conditions deteriorate and force its hand.

A quick glance through the official transcript of the speech shows that Stevens made mention of the exchange rate on no less than 16 occasions.

A lower Australian dollar is vital to supporting the Australian economy’s transition from resource investment to non-mining sectors such as manufacturing, retail, tourism and real estate.

“It is no secret that I, for one, have been surprised that the foreign exchange market has taken as long as it has to reflect the fact that the terms of trade peaked some time ago – nearly two years ago, in fact," said Stevens.

“In the end, though, market-based exchange rates do eventually adjust – and usually in a less disruptive way than those that are maintained artificially.

“A flexible exchange rate is an important part of adjustment over all phases of the cycle and it remains a major advantage that we have one. If the economy ‘needs’ a lower exchange rate, it will probably get it,” Stevens said.

Yesterday, he appeared to give it more than just a gentle nudge in the right direction.

It has since emerged via the Reserve Bank's deputy governor Philip Lowe that governor Glenn Stevens was actually making a "light-hearted remark" when he quipped that the board had deliberated for a very long time on its interest rates decision.

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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