Unintended Consequences

Not a phrase central bankers would like to associate with.  

Just this week, shrugging off questions about his time at the head of the Finance Ministry when it entered into the budget flattering derivatives which have now been revealed to have lost the Italian government about $8 billion, Mario Draghi was able to team up with fresh faced new Bank of England Governor Mark Carney to talk markets up and interest rates (and currencies) down.  So far, so forward guidance (link here, although the FT was more sceptical, feeling a short term effect before rising US rates markets took the stage again).

In complete contrast Australian central bank governor Glenn Stevens had a proverbial foot in mouth moment (exacerbated by his deputy) - telling a "joke" about how much the rates committee had deliberated about holding interest rates at their last meeting (although with the door left open for likely declines soon).

The Reserve Bank of Australia’s deputy governor has been speaking on Thursday. Sadly there were no jokes but Philip Lowe did attempt to explain his boss’s side-splitting gag. 

RTRS – RESERVE BANK OF AUSTRALIA DEPUTY GOV LOWE SAYS BOARD DID DELIBERATE FOR VERY LONG TIME, BUT ALWAYS DOES
RTRS – RBA’S LOWE SAYS GOVERNOR’S REMARKS WERE MEANT TO BE LIGHT HEARTED, WERE MISINTERPRETED 

But some people still don’t get the joke (which you can find on the RBA website).
Here’s a furious ANZ. 

"The Australian Financial Review reported an RBA spokesperson confirmed the RBA Governor’s comments yesterday that the Board deliberated for a very long time on Tuesday (before doing nothing) were meant as a “joke”, rather than a steer on policy. Presumably, however, the Governor would not be unhappy with the further fall in the Australian dollar to a new recent low that occurred partly as a result of this particular remark, but no doubt also as a result of the sober assessment of the challenges facing the economy in transitioning to other sources of growth amid considerably weaker mining investment over the next few years. 

The “joke” was important in our decision to add a further rate cut in August, changing the probabilities of an earlier move in our view (we had still been expecting a further cut later in the year). Given this information has been shown to be false, we should revert to our view of the day before yesterday that the RBA will cut rates again, but probably not until slightly later in the year as, for now, the currency is doing much of the easing work for the Bank and that the bias of risks for Australian official interest rates in 2014 is still assessed to be to the down side....(here)

Most would agree this has all gone a bit overboard.  But it raises a couple of points:

i) as noted in the quote Governor Stevens' statements were much more effective than many previous deliberatons in lowering the exchange rate (which has been a key objective with Australia finally entering the currency war of countries seeking to devalue their currencies).

ii) but central banker's main tool regarding market sentiment is their comments and misusing the tool could weaken it and cause adjustments by market participants (in the above quote ANZ is one example of such a participant).

iii) while the falling Aussie dollar is broadly welcome for Australia, it is not a fait accompli, if the dollar were to fall quickly, in adverse circumstances, it could trigger a loss of confidence which could exacerbate a crisis (such as might occur if there is a sudden withdrawal of hot money, or another meltdown in a big market nearby in Asia).  To lose control of the direction or tempo of currency policy would be a failure of the RBA (and currency management is a de facto remit of central banks in the era of currency wars).  High pitch fears of bears for the Aussie dollar (predicting future lows of US 75c are starting to resonate for some (here).

iv) even if there are no adverse outcomes, the overworking of the Governor's comments may blunt them as a tool in future (with market participants less responsive), making it harder for the central bank to steer policy in a crisis.  Which could be a big concern indeed..

Jim Rickards on the RBA - "foolish"

And its policy will lead to inflation not growth.

Fresh from releasing his bestseller introducing the world to the ongoing Currency Wars, Jim Rickards interviewed on ABC's Business program (see link here) and was really on point on the current dynamics driving monetary policy in China and the US and impacts for Australia.

While not the first to identify infrastructure overkill in China, Rickards was emphatic and went into detail about what is wrong with Australia's policy settings and likely outcomes.

Oh and in case you missed it the RBA has joined the Currency Wars!  This Blog has advocated this as somewhat inevitable (although there are ways to implement and Rickards is correct that the Brazil example is not a good one to follow - hence the criticism to the extent which Australia has followed although not sure if this is accurate).

Rickards' proposed solutions of 12 months ago are unorthodox although it is now an academic question as to whether they would have been successful.

Watch out Australia!

QE down under

So after a week which saw journalists under attack for suggesting all might not be tip top for the Australian economy (Wayne Swan's Treasury note here and the denials about the shrinking Western Australian miracle here), there is now talk of QE as the short cut to restoring dollar competitiveness.

Readers all around will be familiar with the money printing in the US and UK which though lowering the respective exchange rates has corroded savings and stoked inflation.  In Australia, a similar trade off putting ordinary Australians second to the finance sector looms and readers might consider it an open sign of failure by the Australian ruling class.  That or a belated stumble to catch up in the currency war.  Quotes below and stay tuned for more.

With the non-mining sectors of the Australian economy responding less promptly to lower interest rates than in history would suggest, and the A$ still at elevated levels by historical standards, in our view the chances of a smooth ‘baton change’ between growth led by resources investment and growth led by exports and other components of domestic demand are declining.(here)

Dump the banks!

It is early at this stage to tell how the skid to the rally in Australian banking stocks is likely to play out, but a quick skim of the headlines is enough to suggest a real evaporation in sentiment:

Dollar puts an end to banking's party 

Our much-loved bank shares are coming under pressure, although at this stage it looks not so much a violent pricking of the bubble, but a gentle deflating like the forgotten balloon behind the couch after the raucous party (here).

and 

Australian bank stocks fell the most in a year as investors sold out of a rally that had driven financial shares to a record high last month....The rally pushed bank shares to record highs with UBS AG (UBSN) analysts led by Jonathan Mott calling Commonwealth Bank the most expensive lender in the world on May 15. 

 “The market run has been so skewed towards high-yielding stocks and financials in Australia, and now with worries about China, foreign investors are withdrawing,(here)

and also:

Foreign investors dump big four banks 

The Australian dollar faces further sharp losses in the next 12 months as it rediscovers its historic link to commodity prices, analysts say.

The dollar sank to a fresh 11-month-low of 95.94 yesterday. It was trading at 96.8 US cents this afternoon following a rollercoaster overnight session....The revised forecasts from analysts come as HSBC flagged Australia’s entry into the global “currency war”, which has seen central banks print billions in cash to push their currencies lower (here)

About that interest rate cut...

Easing interest rates is THE central bank game in town according to FT Alphaville:

...other big Asian currency war battlers, Australia and New Zealand.

The RBA cut its rates on Tuesday, citing the room afforded by new inflationary data, plus some stronger words on the exchange rate. The next day, New Zealand’s central bank declared it was intervening in its own too-strong currency. Both have their own problems with high asset prices: Australia’s central bank might sound less worried about this just now as growth has slowed, but it’s not ignoring the risk. In New Zealand, house prices are such a worry that the central bank is tightening rules on risk-weighting of mortgages and loan-to-valuation ratios.(here).

Bloomberg picked up on the inherent paradox of apparently increasing jobs undermining the RBA's (and RBNZ's) rate cuts:

Australian industry has been squeezed by the currency’s longest stretch above parity with theU.S. dollar since it was freely floated in 1983 that has made tourism more expensive and exposed local manufacturers to cheaper imports. Rosella, a 117-year-old saucemaker, announced its closure at the start of March, leaving 70 workers without a job. General Motors Co.’s Holden division said last month it will cut about 500 jobs in Australia, citing currency devaluations in competing markets.(here)

and the job figures could apparently be prone to errors:

Australia’s jobs data has swung from gains to losses in the past three months. April’s 50,100 rise was preceded by the loss of 31,100 jobs in March and the addition of 71,700 in February.
“The last couple of months has seen a higher than usual amount of sampling volatility,” said Andrew Salter, a Sydney-based foreign-exchange strategist at Australia & New Zealand Banking Group Ltd. “The market has certainly priced out some RBA easing but I don’t think there’s going to be a view change on the basis of one month’s data. Certainly the trend in the unemployment rate, still being higher, is consistent with the RBA’s outlook.” 

A petition to Glenn Stevens

Rumoured at one point to be the highest paid central banker in the world, Glenn Stevens, has been reappointed as governor of the RBA.  As his second three year term commences, we would like to petition Governor Stevens in respect of the following items which we believe must be addressed urgently:

1. The mining boom is over.  Stop twisting monetary policy to suit this bloated sector and start to focus on the ailing real economy.

2.  Admit the obvious and stop ignoring the currency war.  It is foolish to maintain one's head above the parapet.  All central banks are engaged in debasing their currencies.  The textbook has been ripped up and it is now beggar-thy-neighbour policies.  Ignore this at your peril - the high AUD is hollowing out the economy.

3. Accept that Australia is flooded in hot money which will withdraw in a hurry when yields return to normal.  Reread point 2 in respect of the high AUD.

4. Prepare for vaporisation of the banking system.  The safety in conservatism of the banking system is a myth (and that means the liquidity facility will be used for solvency).

5. Taking account of conditions in Australia and observing overseas, true inflation is much higher than official figures and should be dealt with accordingly.  Australian's purchasing power is soon to erode and quickly.

That's five big points to tackle Glenn.  If you have others, please comment or send an email to feedbackformhere@googlemail.com

RBA fighting a phoney war

Well certainly not a currency war.  As twitter posts have been appearing with news that Malaysia has joined the currency war, RBA board members are now talking about the possibility of joining - following other nations to lower their interest rates....Roger Corbett got a mention (here) as did Guy Debelle...

...‘To date in Australia, we have been able to counter the effects of the higher Australian dollar with lower interest rates,’’ he said in a speech to the University of Adelaide Business School. ‘‘We still, obviously, retain scope to lower interest rates further, should the need arise, including to counterbalance the pressures of an elevated exchange rate.’’....But Mr Debelle warned that cutting interest rates too far could also create problems for the economy - forcing up the price of assets and causing people to borrow more than they could afford....(here).

This is for an economy where there is already a bursting property bubble and asset price trend.

Meanwhile even the RBA is admitting the Aussie dollar is overvalued, but not by much they say!

....THE Australian dollar was overvalued by as much as 15 per cent late last year according to modelling released by the country's central bank....The local currency was between 4 per cent and 15 per cent over valued in September and about 7 per cent above fair value in December, papers released by the Reserve Bank of Australia under the Freedom of Information Act showed....Even so, the central bank papers said the currency wasn't having a "highly contractionary" affect on the economy...(here)

(the Economist calculated the overvaluation at 60% recently).

Rules of engagement

An RBA/Glenn Stevens defence piece by Michael Pascoe in the SMH.  A fair point but for how long will either Australia's policy makers blame the markets for inaction. New Zealand showed a much more assertive stance last week (here).  And while it is true that Australia is a small market that can get flattened by the FX monster, Australia will be in the unenviable position of being the only country not to engage in the currency war.  Brave?

....“You could argue we would be better off with some different configuration: a lower exchange rate and higher interest rates - or more normal level of interest rates - but, given the configuration of the global economy, I just do not think that is possible at the moment. The weakness in the North Atlantic and their money creation is leading to their currencies wanting to depreciate, and someone has to be high.”...(here).

Sounds like "the exchange rate we had to have"... (heard something similar before? here).

 Australia really is the lucky country...!

Australia avoids the currency war at its peril

Terry McCrann has put it best in a refreshing piece in the Sun-Herald:

....AUSTRALIA is caught smack in the middle of a real live shooting war. Even if it's not bullets and bombs that are being fired.The overwhelming majority of Australians don't know it's going on. And if they did, they'd probably think it was good news for them....And up to a point, they'd be right. Trouble is, "that point" was reached some time last year. Until then, we were beneficiaries. Now we're at risk of becoming - serious - collateral damage....It's the global currency war. Everybody has been trying to weaken their currency to boost their own economy. In echoes of the trade wars of the 1930s - stuff everybody else...

...So how it plays out from here, is critical to everything that impacts on your financial and economic wellbeing. Property prices. Interest rates. Inflation. The stock market. Superannuation. Whether you have a job. Which businesses thrive, which ones shrivel....In recent weeks, the Aussie dollar has drifted in something of a backwater around $US1.03....  The RBA might not seem too fussed. But it is very, very fussed. (here).

Alan Kohler had a good piece looking at the role of Japan and the inability of the Australian government to do anything meaningful.  Are you paying attention Wayne?

...In this context, the Labor Government's "industry and innovation" plan this week is a drop in the ocean, not that anyone expects a big dollop of deficit spending to support manufacturing, or expects the Reserve Bank of Australia to join the currency wars and target higher inflation....

The RBA and the ALP have done what they can. The cash rate is now as low as it's been for 40 years and despite some problems with unionised construction, wage costs overall are not really a problem.....But despite record low interest rates, monetary conditions for Australian businesses are at a record high.....That's because the transmission mechanism between interest rates and the exchange rate has broken down, in turn because of three waves of quantitative easing by first the US, then Europe and now Japan....Japan, straw, camel's back (here).

NZ performs the Haka

In the currency war being unleashed around the world, central bankers have some weapons at their disposal but not many.  Trading strategies - money printing, security creation and bond buying have taken off in the last few years but the role of policy, briefing and government led signals are important too.  The most notable stunts have included a parade of camera work at the Bank of England gold vaults (including a visit by Queen Elizabeth II), sound bites by Russian central bankers and outright lies issued by the G20.

New Zealand has chosen to go for the talking down option (sensible given New Zealand is a small country with little reserves) but has really performed a Haka dance - that made famous by the All Blacks rugby team, defined by Wikipedia as:

... a traditional ancestral war cry, dance or challenge from the Māori people of New Zealand. It is a posture dance performed by a group, with vigorous movements and stamping of the feet with rhythmically shouted accompaniment...

As detailed by FT Alphaville, NZ is entering the fray:

....We believe the exchange rate is significantly over-valued relative to what would be sustainable long term in the absence of sizeable increases in the terms of trade and productivity....The Bank will intervene when circumstances are right. We will use the OCR as circumstances require and we’re exploring the scope to use macro-prudential instruments that address increasing challenges to financial stability associated with ongoing increases in house prices, and that can also support monetary policy.... (here).

http://1heckofaguy.com/

Now, it is about to be Australia's turn, yet the RBA is silent...what gives?!

Swans in denial

...are not graceful...when is Treasurer Swan and the team running the Oz economy going to tune out of their cognitive dissonance?

...In a forceful intervention near the end of the conference Mr Swan said much of the talk about "so-called currency wars" was "completely misguided". It "unhelpfully reduced the focus on the G20's critical agenda to boost growth and create jobs".

What other finance ministers thought of as intervention to devalue currencies was more often the byproduct of completely appropriate moves to try and kick-start economies, he said...

...Earlier he had told Bloomberg television the yen's devaluation was ''a matter for the market''. The Japanese approach was "to stimulate their domestic economy. That is also good for the global economy.''... (here)

Japan selling AUD...an early shot in the currency war?

Or just simply smart money leaving?  Either way it signals a reversal of fundamentals for Australia.

......If we isolate the November and December MoF numbers for 2012, the pace of selling was even more aggressive. Almost A$8bn of Australian assets was sold in those two months alone by Japanese investors. That is an all time record and gives a clear sense of how aggressive this selling was... 

...Since Abenomics began in November 2012, total foreign bond purchases have not accelerated (chart 2) but the regional rotation has accelerated. Monthly MoF data show strong buying of core Europe (¥817bn per month), tiny selling of peripheral Europe and New Zealand (-¥7bn and -¥9bn), negligible buying of the US (¥2bn per month), significant selling of Australia (-¥235bn), and a meaningful increase into EM Asia and Latin America (¥73bn and ¥159bn, respectively)....(here).

Fighting the currency war with a "preashooter"

Aussie Dollar the most overvalued currency says Fairfax

...The Australian dollar is the most overvalued currency in the world, but there is little will to intervene, according to a global valuation.

Using data from the OECD's measure of purchasing power parity, The Economist's Big Mac Index and the Current Real Effective Exchange Rate (REER) as compared to its five-year average, HSBC found that Australia had the world's most overvalued currency, while having policymakers who were among the least active in the so-called ''currency war''.

''We just don't want to take that kind of risks. We are a small country,'' Mr English added. ''We'll be out in the war zone with a peashooter.''

Reserve Bank of Australia governor Glenn Stevens briefly mentioned the Australian dollar in his statement following the central bank's decision to hold interest rates at 3 per cent for this month, writing that ''the exchange rate remains higher than might have been expected''.(here)

Australia in denial about currency war...

...THE entry of Japan into the global currency war -- a kind of echo of its bombing of Pearl Harbour in December 1941 to enter World War II -- presents a fresh challenge for policymakers everywhere, but especially in Australia......But it's against the Australian dollar that the yen has fallen the most. The Aussie has appreciated 19 per cent against the yen since October but only 3 per cent against the US dollar...(here).



...Australia's economy requires "active management" this year to offset the slowing mining boom and the high value of the Australian dollar, said a board member of the Reserve Bank of Australia, or RBA, in an interview Wednesday.... Heather Ridout, one of nine policy setters on the RBA's board was speaking ahead of the first meeting of the central bank this year scheduled for Feb. 5, when concerns over the persistent strength of the Aussie dollar above parity with the U.S. greenback will again be in focus. Some 1.75 percentage points of rate cuts since November 2011 have failed to ease ...(here).