The Reserve Bank of Australia (RBA) board recently conveyed the view that it was happy with developments with the Australian dollar. Less than three weeks ago in its February monetary statement, governor Glenn Stevens suggested that the currency “has continued its adjustment to the evolving economic outlook”.
However, it appears not everyone at the RBA shares that view.
In an interview with New Corp papers earlier today, board member John Edwards suggested that the Australian dollar was too high at the current level of around 71 cents, suggesting that he would be more comfortable if the currency was trading at around 65 cents.
The admission from Edwards is the first sign in recent months that the RBA is growing increasingly uncomfortable with the currency’s recent resilience, something that resulted in part from aggressive monetary policy easing from the likes of the European Central Bank and Bank of Japan, along with a lowering of expectations for US rate hikes from the Federal Reserve in the year ahead.
Edwards expressed concern that the fall in the Aussie, which began in 2011, looks to have concluded, suggesting that easing from other central banks risked pushing the currency higher in the period ahead.
“It does look like it has found a base, and I guess I would say I still think it is a bit too high,” Edwards told the Wall Street Journal. “If it was driven entirely by commodity prices, it certainly should be lower.”
“If the rest of the world moves further into negative rates territory then the differential with Australia’s current policy stance would widen, and that would put upward pressure on the currency,” he added.
Since mid-January, when the Aussie hit a six-year low of .6824, it has been well supported on dips, something that corresponded with a scaling back of US rate hike expectations and a rebound in the price of Australia’s chief commodity export, iron ore.
Talk of deeper rate cuts from the ECB, perhaps as soon as March, along with the decision by the Bank of Japan to adopt a negative interest rate policy in late January, may have also contributed to the Aussie’s resilience on the back of widening interest rate differentials.
The concern expressed by Edwards, along with increased chatter for the potential need for further rate cuts from the likes of Tim Toohey of Goldman Sachs, has certainly had a response amidst thin trade in currency markets on a quiet Friday afternoon.
As the chart below shows, the Aussie has fallen sharply in response, hitting a session low of .7097 against the US dollar before rebounding modestly in recent trade.
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