SYDNEY, Nov 21 (Reuters) - Australia’s top central banker on Thursday said he was “open-minded” on whether to intervene to try and push the Australian dollar lower, escalating a rhetorical campaign against the painfully high currency.
Reserve Bank of Australia Governor Glenn Stevens has long complained that the currency is fundamentally overvalued and needs to fall to help the domestic economy cope with a cooling mining boom.
On Thursday he went a step further by canvassing the case for the central bank itself selling the local dollar.
“Overall, in this episode so far, the Bank has not been convinced that large-scale intervention clearly passed the test of effectiveness versus cost. But that doesn’t mean we will always eschew intervention,” Stevens told the Australian Business Economists’ annual dinner.
“In fact we remain open-minded on the issue,” he added. “Our position has long been, and remains, that foreign exchange intervention can, judiciously used in the right circumstances, be effective and useful.”
The local dollar, known in markets as the Aussie, has been holding around $0.9300 this week, having been as high as $0.9758 in October and as low as $0.8848 in August. Even at the low point, the RBA had argued the currency was an uncomfortable burden for trade-exposed sectors of the economy.
Stevens has mused on the prospects for intervention before but always came down against it.
Indeed, in his speech he noted there would be costs to the RBA as any foreign assets bought through intervention would certainly yield much less than Australian debt.
It would also open the central bank to “very large valuation risks”, should the local dollar not fall as intended, he said.
To be effective, any intervention would have to work with fundamentals and not against them, Stevens said, noting there were powerful global forces at work keeping the currency high.
One such force was the massive increase in Australia’s terms of trade - what it gets for its resource exports compared with what it pays for imports - over the past decade.
This shift had been so large and so persistent that it was no longer clear that the Aussie would return to levels that used to be considered “normal” around 70 U.S. cents.
“Notwithstanding that, in my view, the Australian dollar is probably above its longer run equilibrium at present, it is far from clear that we can assume that the mean level we saw in the 1980s to the early 2000s will be the relevant one in the future,” said Stevens.
Other forces holding the Aussie up included Australia’s top notch triple-A credit rating which has made its debt attractive to foreign central banks and sovereign wealth funds.
A lot of offshore money has also flooded into Australia’s booming mining sector in recent years, Stevens added.
A further complicating factor, Stevens cited, was the extraordinary monetary policy stimulus being undertaken in the United States, Japan and the euro zone, which has tended to depress their currencies.
While the RBA has cut its cash rate to a record low of 2.5 percent, that is well above the near-zero rates seen in many major economies.
Many analysts suspect the central bank would prefer not to cut rates again, in part to avoid inflating a bubble in Australian home prices, and instead rely on a drop in the Aussie to support the domestic economy. (Reporting by Wayne Cole; Editing by Chris Gallagher)