No one expects the RBA to cut rates today but Glenn Stevens’ obvious angst about a high Aussie dollar offers him the perfect opportunity to bring home an outsider and persuade his colleagues on the RBA Board to do what they have often done recently on Melbourne Cup Day and cut rates.
Now of course this is an outlier call, but if the Aussie dollar is not the most important transfer price in the Australian economy, then what is?
Australia is a trading nation – we buy and we sell. It’s why almost every major trading room on the planet has an Australian in it and often as a chief dealer – we are traders.
Locally built Holdens, Fords and Toyotas compete with Kias, Great Walls, Dodges and Nissans.
Our education industry competes increasingly with improving Asian institutions, not to mention the many global education powerhouses all over the world.
We have the most beautiful beaches in the world but Fiji and Thailand seem cheaper – especially at family meal time or if you want Singha or a Fiji Bitter.
Our bookstores and major retailers are assailed by Amazon and other retail websites.
Even our stock market return – the ASX – is just a reflection of the movements in the AUDUSD, as this chart from David Scutt at Arab Bank suggests.
The Aussie dollar is all pervasive throughout the economy and Governor Stevens’ intervention last week to talk the Aussie down was if not unprecedented, then at least super aggressive by Central Banker standards. But this morning the AUDUSD is back above 95 cents.
Now of course he won’t advocate a cut if the markets are correct. Housing is going through the roof and price rises are accelerating, retail sales are finally starting to accelerate – as we saw yesterday – and manufacturing has finally started to expand, as we discovered in the AiG performance of manufacturing index last week.
Indeed the RBA minutes for many months now have said that “The effect of low interest rates was evident across a range of indicators and had further to run”. Last month in his statement, Stevens said: “The full effects of these decisions are still coming through, and will for a while yet.”
So why cut?
Because in a world of subtle but effective currency debasement lead by the central banks of the US and Japan, the RBA has an opportunity to surprise markets. If they exercise that right, the Aussie dollar will fall – and fall hard.
If they can engineer that, then the real and enduring transition of the Australian economy from the mining boom will have begun.