Aus/NZ solidarity

Australians are a competitive lot.  They punch above their weight on the international stage, in particular in the sporting arena and Aussies like to win, and, to play in the big leagues.  In the world of currency management, or in particular, the global currency wars, the FT has reminded that Australia and New Zealand are unfortunately minnows when it comes to suppressing the exchange rates of their currencies from hot money appreciation - they hold a "peashooter" rather than a bazooka.

...New Zealand’s direct action was the most aggressive, but it seems designed to soften the kiwi’s strength rather than halt the trend in its tracks. Which is just as well given that a housing bubble is limiting officials’ room for manoeuvre. With two-year bond yields near 2.5 per cent (compared with the US at 0.23 per cent and Japan at 0.11 per cent), it is hard to see the New Zealand dollar extending last week’s 2 per cent drop against its US counterpart.
Meanwhile, Australia’s unexpected rate cut had a similar effect on an Aussie dollar hovering just above parity with the greenback. Bond yields there are in line with Kiwi ones. So are Korea’s. Of the three Seoul is historically the most aggressive in acting to stem currency strength. But it faces the biggest problem, namely that it is in effect fighting not the dollar but the yen, against which the won has hit four-year highs (here).

And this game has gone global.  As Zerohedge notes, even Israel has joined, though with a not very convincing alternative excuse other than the currency wars. 

RBA in numbers

Interesting data out via a Bloomberg FOI request (via FT Alphaville).  Some detail of foreign holdings of AUD (in particular central banks) and the way RBA goes about determining the extent of overvaluation.

....The staff's preferred model is based on the long-run relationship between the real exchange rate and the terms of trade and the real policy rate differential with the G3 (US, euro area and Japan) over the post-float period. It suggests the exchange rate is around 5 per cent overvalued.......While the bank has signalled that the dollar has been a factor in deciding recent rate cuts, and there's been a bit of 'passive intervention' with a chunk of foreign currency, so far it does not seem to have done much....

...We have to wonder how much of the central bank's low-key response to the AUD's overvaluation is because officials genuinely think the Australian economy can cope, and how much of it is because doing anything about it is too damn difficult. The RBA is already in a cutting cycle but slashing rates very low would risk inflation. Going Swiss is not an attractive option for small economies that have inflationary pressures; as the New Zealand central bank governor outlined last week....(here)

Fair enough but what is likely disturbing is that there are well a couple of assumptions in play, particularly that i) the high AUD hasn't had an impact yet (arguably it has) and ii) the RBA still has control of its currency

...In that scenario, how long might it take before even a 'moderately' overvalued currency takes its toll? We also can't help noting that the central bank of New Zealand, a much smaller economy in a very similar predicament, has decided that despite the risks it is time to go a little harder by explicitly threatening intervention .... RBA governor Glenn Stevens says that if things get really bad, a strong Australian dollar probably would cease being a problem....

What if the AUD doesn't fall or falls very abruptly?  There is a currency war after all. And in case you are wondering whether imports (including outward tourism) are on expanding too rapidly, symptomatic of an overvalued currency, then read this.