Turns out Glenn Stevens is an avid reader of my blog.
Early last week, I was talking about how Glenn had taken to jawboning the Aussie dollar, trying to convince everyone that it should be a whole lot lower.
And I also explained why it wasn’t working.
That was Tuesday. On Thursday, he’d taken my advice that some light jaw-boning wasn’t going to do the trick, and Glenn started getting heavy. All of a sudden markets were jumping all over the place at the sight of ‘gun-happy’ Glenn waving his piece all over the place.
He let people know he had the cash and the will to try and drop the dollar if needed.
It was more jawboning, but it wasn’t the lite stuff we’d seen before. This was some ‘full-cream’ jaw-boning.
The dollar’s too high and I’m not going to stand for it!
Pow! Pow! And it worked! The Aussie dollar broke through support at around 92 cents, and free of the range that has held it captive for months.
Markets applauded the sheer power of his voice, the fathom of his speech, the persuasiveness of philosophising.
Such a cunning linguist.
But while I’m a fan of Glenn Stevens, I think we may at risk of casting him in a mythical light, and giving him more power than any man (even a central bank governor) could have.
So let’s recap. It all started with a speech the Guv’na gave celebrating the float of the Aussie dollar. After a fairly bland lesson in economic history, he came to the juice.
He opened by restating a theme the RBA’s been running with for a while now (and as I picked up in my blog last week) – the dollar’s higher than it probably should be, and we’d like to see it a whole lot lower.
In his words:
My judgement is that the Australian dollar is currently above levels we would expect to see in the medium term.
That’s a straight as straight talking gets. But as I said, it hasn’t been enough. And so Glenn took it to the next level.
Here’s the money shot:
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. In fact we remain open-minded on the issue.
Our position has long been, and remains, that foreign exchange intervention can, judiciously used in the right circumstances, be effective and useful… it remains part of the toolkit.
I’ve got a gun and I’m not afraid to use it.
Note that he didn’t say he was going to use it. He was just reminding people that he had one, and if the circumstances required it, he might just do that.
I seems bland to us ordinary folk with our ordinary language. But in the world of markets and central bank governors, these were stern words in deed.
If you ask me, what Glenn and the RBA have been doing for the past month or so is trying to get people to focus on AUD fundamentals. For a long time all the significant movements in the AUD/USD exchange rate have come from the other side of the balance – from what’s going on with the US dollar.
It’s had such a huge effect, that people stopped looking what was going on in Australia, and were only worried about what was going on in the US. Glenn was just trying to bring attention back to ‘Aussie fundamentals’ – the terms of trade, the economic outlook etc. – none of which supported the level of the Aussie where it was.
Trouble was though, no one was listening. What was going on in America, the madness of QE and the coming taper – it was all too exciting, too sexy.
So Glenn had to get some attention.
Reminding people he had a gun, got people wondering if he was going to use it. Why would he wave that thing about if he wasn’t?
And if I bet with the Governor, back a falling dollar, will the market support me? What actually are the Aussie fundamentals?
And suddenly everyone’s talking about Aussie fundamentals. The newspapers are full of it.
Genius. Such a cunning linguist.
This is a longer term play. Bringing attention back to Aussie fundamentals will get momentum going south over the next couple of months. Well played Mr Stevens.
But it’s wrong to say that last week’s fall in the Aussie was all due to Stevens’ fighting words.
Because the really big news last week was reports from the US Fed that the Taper was back on… From the Fed Minutes:
…During this general discussion of policy strategy and tactics, participants reviewed issues specific to the Committee’s asset purchase program. They generally expected that the data would prove consistent with the Committee’s outlook for ongoing improvement in labor market conditions and would thus warrant trimming the pace of purchases in coming months.
This is real news. And it dwarfs any posturing on Stevens part.
Because the markets, and Glenn, know full-well there probably isn’t much that the RBA can do about the currency anyway. The RBA just doesn’t have the pockets.
Global currency markets are massive. MA-A-A-A-A-SIVE. And the AUD-USD pair is the fourth most traded currency in the world.
Central banks just don’t have the reserves to take that kind of battle on – to push markets where they don’t want to go.
And it opens up the possibility for currency speculators to start betting against you. Betting that you don’t actually have the money to keep the currency where you want it to be. Think George Soros in the Asian financial crisis.
Once the speculators side up with the market, you’re on a hiding to nothing.
Glenn’s talking tough, but he’s not stupid enough to start picking fights with the market.
The best he can do is exactly what he’s done. Get people thinking that the AUD is currently overvalued, and that is has a ‘true’ equilibrium value closer to 80 than 90 cents.
Bravo Glenn. It’s a clever play. I hope for your sake (and ours) it pays off.
P.S. Obviously I can’t be sure if Glenn actually reads my blog. My opening question is tongue-in-cheek. You get that, right? But what is certain, is that what I recommended actually happened. Like a lot of other things that I have predicted in the last 12 months. What does it all mean?
…It’s worthwhile reading my blog and being part of my community.