Lunacy

Distinguished Australian Professor Ross Garnaut has reportedly called for a cap on the Aussie Dollar to slow inflows and cushion the impact from falls when the commodities cycle turns:

...Ross Garnaut, one of the authors of the float of the Australian dollar 30 years ago, warns that the Reserve Bank might have to consider intervening to push it down to minimise the recession he sees coming as the mining boom goes bust....Professor Garnaut, of the University of Melbourne, says he would rather see the RBA cushion the economy’s looming fall and bring down the overvalued dollar by cutting interest rates sharply to bring them closer to those of other Western countries.......But if conventional means fail to cut the dollar’s value and relieve the pressure on other tradeable industries, he told a seminar at the Australian National University, the Reserve should consider following its Swiss counterpart’s example and put a cap on the dollar’s value (here).

There is some academic sense to this, but to be clear, whilst the Swiss Central Bank has maintained a floor against the Euro in the last couple of years (i) it started with a huge haul of reserves to defend the floor (buying up enormous quantities of Euro securities to keep the Euro relative to the Swiss Franc high and the Franc low), (ii) it was tested by the market, (iii) domestic inflation resulted and (iv) quite probably it had a role in precipitating the scandal in which the chief of the bank, Hildebrand left (though ostensibly because of his wife's trading activities).

Australia is not a financialised economy like Switzerland and will not have the reserves to do so, nor will it be able to survive under even more inflationary conditions that would result.  Professor Garnaut's reasoning is fair but its unlikely to be implemented.

Interestingly, the Reserve Bank of New Zealand has looked at the same question and concluded it's a non-starter:

...If New Zealand decided to cap the NZ dollar, depending on where the cap is enforced, similar levels of intervention might be required as global foreign exchange turnover in NZ dollars relative to GDP is similar to that in Swiss francs. The OCR would need to drop to zero first in order to eliminate the interest arbitrage motivation for NZ dollar inflows. Any attempt to retain non-zero interest rates by “sterilising” such massive intervention would be very difficult. In effect therefore, a Swiss type operation to cap the value of the NZ dollar through large scale FX intervention would also amount to quantitative easing. As I mentioned, this would be highly inflationary in the NZ context.(here)

It could be argued that the horse has bolted already anyway - yes Australia will suffer the falls in GDP from China slowdown (and Professor Garnaut should know as his son is a top China focussed journalist), but to use the expression of Julia Gillard, these losses are "baked in" - there is little Australia can do now to change course, especially since the real economy has been hollowed out.

Australia is entering the currency war, but there are questions as to what can be achieved.