Yesterday we asked the question why Glenn Stevens has suddenly become so negative on the Australian economy, positing that it was all about the Australian dollar.
We received confirmation of this fact in a wide-ranging Australian Financial Review interview this morning.
Stevens told the AFR:
“To the extent that we get some more easing in financial conditions, at this point it’s probably more preferable for that to be via a lower currency at the margin than lower interest rates.”
He said with the falling terms of trade, he expects the Australian dollar’s natural level to be lower than its current rate, which was US90.24¢ on Thursday. “I thought [US]85¢ would be closer to the mark than [US]95¢ . . .but really, I don’t think we can be that precise,” he said.
“I just think that if things over the medium term evolve as we’re presently assuming – and I think it’s reasonable to make these assumptions – it’s going to be surprising if a nine at the front is the right number.”
The Aussie dollar has always been the Australian economy’s natural stabiliser, falling when growth needed a little help and rising when growth needed to be tempered. But the attention of global investors and the amount of investment dollars they have placed in Australian banks, bonds and stocks risks the Aussie remaining stronger than it should otherwise be in the months and years ahead.
Clearly Stevens is going to fight a stronger Aussie dollar and fight it hard.
So far he is winning the battle.
Here is the chart of the AUDUSD overnight:
It’s a hell of a way to celebrate your 30th birthday and raises questions of how low the Aussie might go into year end.
Governor Stevens is hoping much lower.