Fascinating analysis this morning from Westpac’s Strategy team, lead by Rob Rennie, which addresses the impact of RBA intervention on the Aussie.
Of particular focus is whether or not the recent RBA “jawboning” (talking the Aussie down) by the RBA and it’s governor Glenn Stevens has any real impact.
To recap, the RBA has been saying the Aussie dollar has been “uncomfortably” high for some time now and last week Stevens upped the ante telling the Australian Financial Review that:
I thought [US]85¢ would be closer to the mark than [US]95¢ . . .but really, I don’t think we can be that precise
In a paper that looks to quantify the impact of intervention, both physical (actual buying or selling) and verbal (where the RBA just talks about the dollar), Westpac finds that the “strong” recent verbal intervention has worked exactly as the governor intended it.
In terms of the cumulative impact of strong verbal intervention, the chart above plots the two model estimates for the AUD (benchmarked to the start of July).
As we have seen an increase in the stronger verbal intervention, the divergence between the model with the RBA variable included and the model that excludes this variable has grown quite significant.
Indeed, since the middle of the year, the model which includes the RBA intervention variable has dropped 5.7%.
In contrast, the model which just includes traditional macro variables has seen only a 2.5% drop (the majority of this drop has been on the back of rising market risk aversion). This suggests the cumulative impact from strong verbal intervention has been in the order of a quite plausible 3%
Governor Stevens will be pleased.