The Aussie dollar fell steadily through November aided by the aggressive verbal intervention by RBA governor Glenn Stevens, who continues to warn and look for a material drop in the Aussie.
The reason he wants a lower Aussie is because a lower exchange rate will help balance out growth across the economy by delivering a competitive advantage to local businesses and manufacturers competing against overseas goods and services which are relatively cheaper because the Aussie dollar is strong.
In yesterday’s statement after the RBA Board meeting, the governor reiterated this point by noting that the Australian dollar “is still uncomfortably high”. This comment, along with the bigger-than-expected balance of payment deficit, knocked the AUDUSD to a low of 0.9043, but it is back at 0.9130 this morning.
According to Rob Rennie, Westpac’s global head of market strategy, the problem for Stevens – and perhaps why the Aussie has rallied back almost 100 points from yesterday’s low overnight – is that the RBA’s desire for a lower dollar is in conflict with foreign investors’ renewed appetite for Australian investments.
Rennie says that “ignoring short-term flows such as currency deposits and only focusing on long-term flows such as portfolio equity, debt and foreign direct investment” is the right way to think about funding the current account deficit. This is summarised in the chart below which “plots Australia’s basic balance against the annual change in the A$ versus the USD, € and ¥.”
Looking at the data released yesterday, Rennie said: “Australia’s basic balance rose to A$35bn in the year to Sep 2013. That is, the combination of the sum of Australia’s current account deficit (-A$51bn), the annual net portfolio balance (A$43bn) and the annual net FDI balance (A$43bn) was the strongest since mid-2012.”
Which to Rennie means that we’d need to see a big drop in the fundamentals underlying the Australian economy and the Aussie dollar to see much of a drop from current levels.
He concludes that it “will be hard to see the ‘material’ fall the RBA governor recently suggested quite likely given today’s financial account data.”
Glenn Stevens won’t be pleased. Expect to hear more on this in the months ahead.
Greg McKenna is an active currency trader and is currently long the Aussie dollar