RBA Governor Glenn Stevens used a speech in Tasmania today to let currency traders know the Aussie dollar is on borrowed time.
He reiterated the point he made on Tuesday that the strength of the economy has been overstated by Austalia’s Q1 2014 GDP, highlighting this:
The results owed a lot to a very substantial rise in resource exports. This in turn reflected new capacity coming on stream and also unusually benign weather. While further rises in resource export volumes are expected, they are unlikely to be at the same pace.
Hence, the most recent set of GDP figures, while certainly encouraging, probably overstate somewhat the true ongoing pace of growth in the economy.
He added growth would be below trend going forward which, if you subtract Q1 strength, means at least one very sub-par quarter of growth ahead simply to balance out his maths.
But so as not to have traders misunderstand him on the link between Australia’s growth outlook and the Aussie dollar Stevens said:
But lest there be any uncertainty about this, let me be clear, again, that the exchange rate remains high by historical standards. There is little doubt that significant parts of the trade-exposed sectors still find it quite ‘uncomfortable’: it continues to exert acute pressure for cost containment, productivity improvement and business model change. When judged against current and likely future trends in the terms of trade, and Australia’s still high costs of production relative to those elsewhere in the world, most measurements would say it is overvalued, and not by just a few cents. Of course, we live in unusual times, with interest rates at the ‘zero lower bound’ in several major jurisdictions. Nonetheless, we think that investors are under-estimating the likelihood of a significant fall in the Australian dollar at some point.
The Aussie dollar is now down 1.2 cents from the highs of two nights ago and half a cent from where it was trading before Stevens speech.
Disclaimer: Greg McKenna has a small short position in AUDUSD taken after yesterday’s trade data.