Squeezing monetary policy

Nothing unusual in politicians seeking to pull the levers of supposedly independent monetary policy with some public comments and a coming election in mind.  Question is, in the midst of a currency war with central bankers from Japan, Cyprus, Europe, UK and US all feeling the politcal heat to abandon orthodoxy and print, will Julia begin a trend of greater pressure on the RBA?

...Prime Minister Julia Gillard says that the federal government’s ‘‘tight’’ fiscal stance leaves room for the central bank to cut interest rates as manufacturers try to cope with sustained currency strength....
...‘‘Our success as a resources economy, as an economy that’s emerged from the global financial crisis strong, has meant that our Australian dollar has been very high,’’ Ms Gillard said hours after meeting with business leaders advising the government on its 2014 presidency of the Group of 20 nations..... (here)

As has been posted, Garnaut and others have discounted the comfort such statements and assumptions propagate - the Asian mining boom is ending and income and growth will drop but FTAlphaville noted another reason why this is dangerous:

Hot Money

It turns out Australia is being funded by non-conventional sources, with the implication being it is "hot" and can be withdrawn very quickly in a crisis (and quick hot money withdrawal means currency crisis and/or collapse):

...At face value, given the share of foreign companies involved, the analysis implies that around half of the investment during the boom has been funded from offshore. However, the actual use of foreign sources of funds is much higher than that. This is because wherever companies are partly foreign owned, funding from internal sources is equivalent to partial funding from foreign sources. Consequently, since the Australian listed resources sector is around three-quarters foreign owned, the same large proportion of internal funding is attributable to foreign sources.... Taking all this together suggests that around four-fifths of the investment funding has been sourced from offshore (here).

AUD is not a reserve currency...

An interesting side issue from the currency war debate.  In talking up the likely devaluation of the Aussie dollar, Debelle mentioned its widespread holdings among central banks.  It is true that hot money, including from central banks has been attracted to Australian bonds, with Australia seen as a relative safe haven, having high interest rates and good metrics.  

First thing to note is that metrics are degrading.  Swan's budget is sinking into deficit like a dead dodo (estimates are sinking to $15 billion here).  This means less incentive to hold Aussie dollar bonds.

But more significantly, Australia is a very small economy.  The argument made previously for not intervening is that Australia's debt markets and central bank are too small to counteract global flows.  Overall, thanks to mining plays, Australia's dollar has the character of an emerging market currency, once hot and decoupled from atlantic turmoil, now facing outflows.

Unlike China, which cannot sell parts of its massive holding of treasuries for fear of wiping out its remaining holdings, there is no reason why all those central banks Debelle is talking about will feel inclined to keep their Aussie bonds.  Debelle said:

....There's no limit on our ability to supply Australian dollars...we have more Australian dollars than anyone else in the world because we print them," he added, pointing out that Switzerland had successfully capped the value of the Swiss franc against the euro since 2011....(here)

Firstly there is no comparison between Switerland and Australia in terms of the size of their fx markets or Switzerland's proximity to the Eurozone.  Secondly and more importantly, who will even want Aussie dollars in months and year's time?