The overnight fall in the Australian dollar
shows - once again - that just a few carefully targeted words from Glenn
Stevens have the power to move markets.
While Mr Stevens didn't say the Reserve Bank
was about to intervene to pull the dollar down, his comment that the option was
in the monetary policy "toolkit" proves that words from central bank
governor can be timely bullets.
And the impact-laden comments show the
Reserve Bank's frustration in its attempts to lower the dollar, despite 2.25
percentage points in cash rate cuts since late 2011.
The dollar's fall accelerated as Mr Stevens
rolled out the "intervention" word, even though he has used
this type of language before in keeping the option open and refusing to rule
anything in or out.
But speaking to an audience of
dollar-focused market economists and journalists, Mr Stevens knew his comments
would hit the newswires immediately and take the stubbornly high dollar even a
bit lower.
"Our position has long been and it
remains that intervention can, in the right circumstances, judiciously used, be
effective and useful," Mr Stevens told the Australian Business Economists annual dinner in Sydney last night.
"It can't make up for policy weaknesses
in other areas and it can't really stand against fundamentals but subject to
those conditions, if it works with fundamentals, it can be effective and so it
remains part of our toolkit."
"That doesn't mean we will always eschew
intervention."
While the wording was calm and measured,
there was no doubt about the Glenn Stevens' intentions.
Mr Stevens knows even light-hearted comments
about Reserve Bank deliberations can set blood pressures racing.
Back in July, Mr Stevens said that the RBA
board had “deliberated for a very long time” when it decided to keep the cash
rate on hold.
Market economists took that to mean that a
rate cut was on the agenda and revised their forecasts accordingly.
Mr Steven’s deputy Philip Lowe was forced to
clarify the next day that the comments were part of “a very light-hearted
introduction” that the media had misinterpreted.
But even before Glenn Stevens started speaking last night, the Australian dollar
had been gradually falling.
It was well-telegraphed that Mr Stevens was the keynote speaker at the
dinner so the decline was partly in anticipation of Mr Stevens' likely
"jawboning".
Much earlier on Thursday morning the dollar fell from a high of 94.05
US cents after the
US Federal Reserve said it might reduce its massive stimulus program "in
the coming months".
The decline continued until the dollar
bottomed at 91.98 US cents at 5.24 AEDT in what appears to be partly via the Stevens
"intervention" comments and heavy selling of the Australian dollar
from the United States.
Taking all factors into account, the
Australia dollar fell by more than two US cents over that period.
But this morning as reality about the Reserve
Bank's task of taming the dollar returned, the dollar recovered to as high as
92.66 US cents.
The Australian dollar has rocketed in the
recent years to a peak of 110.61 US cents in August 2011 after Australia
sidestepped the global financial crisis and China-led mining investment boom
spurred growth.
But manufacturers and exporters have been
squeezed, prompting changes on the industrial landscape including the
decision by Ford to exit Australia in 2016.
With a cash rate of 2.5 percent and concerns
about rising property prices, the Reserve Bank will be reluctant to cut rates
again.
So with the rates cut instrument likely to
remain idle in the monetary policy toolbox, talk of currency intervention in
the right circumstances is likely to become louder especially if the US Federal
Reserve delays its stimulus windback.