Australia's Central Bank Would Like To Weaken Its Currency

Overnight the Reserve Bank of Australia (Australia’s central bank) cut benchmark interest rates by 25 basis points to 2.75%.

The full statement from Governor Glenn Stevens is here.

In a note, Nomura economist Charles St. Arnaud flags one particularly interesting line that will get the “currency wars” crowd buzzing.:

The accompanying statement was not overly dovish and did not signal a dramatic change in the way the RBA views the economy. It continues to expect the economy to growth at below trend in 2013 as the level of resource investment peaks this year. While other sectors of the economy are improving, it seems that the RBA believes any improvement is unlikely to be strong enough to offset the slowing of the resource sector.

Moreover, concern over the strong AUD seem to have risen, the RBA noting that “the exchange rate has been little changed at a historically high level over the past 18 months, which is unusual given the decline in export prices and interest rates during that time”. We take this to reflect that the currency strength is not supported by fundamentals, and thus is a disproportionate drag on the economy.

The Aussie dollar did fall last night after the cut, but its strength over the last several months has been discussed, as it’s inconsistent with the weakness in China and commodity prices. The Reserve Bank of Australia would not mind the exchange rate coming down.

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