The Australian central bank’s attempts to talk the local currency lower last year ran afoul of the U.S. Treasury, which chided officials by reminding them of their commitment to a freely floating exchange rate.
The U.S. representative office at the International Monetary Fund in September “expressed concern over the authorities’ public statements on the desired direction of the exchange rate,” regarding Australia, it said Monday in Washington. In August, the Reserve Bank of Australia’s monthly policy statement modified its exchange rate language. After saying currency “depreciation seems both likely and necessary,” in July, Governor Glenn Stevens said the following month, “the Australian dollar is adjusting to the significant declines in key commodity prices.”
The RBA consistently said in recent years Australia’s dollar was stronger than warranted considering the collapse in prices for commodity exports, and the currency was hampering efforts to boost services industries to make up for the collapse in mining investment. Officials cited strong demand for the higher yields offered by Australia’s government bonds — as central banks in Japan, Europe and the U.S. cut interest rates toward zero and carried out massive asset purchases — as a driver of the exchange rate’s resilience.
“Every country at the moment typically wants a lower exchange rate,” said Richard Grace, chief currency and rates strategist at Commonwealth Bank of Australia in Sydney. “If a central bank says the exchange rate should be lower based on fundamentals then they’re not breaching any guidelines according to the IMF or the U.S. Treasury. When they step out of that, I guess this is why Australia has been pin-pointed.”
The RBA and the Australian government declined to comment on the matter Tuesday when contacted.
The Australian central bank’s August statement was the first time in more than a year that the rate announcement didn’t indicate further currency depreciation might be warranted. It sparked a surge in the Aussie.
The report on the actions of the U.S. Treasury and the Office of the U.S. Executive Director (OUSED) may point to why RBA officials have since tempered their language on the Australian dollar.
In his annual interview with the Australian Financial Review published Dec. 16, Governor Stevens declined to nominate a preferred level for the currency, merely noting that the foreign-exchange rate was adjusting and further moves were possible on the back of commodity price declines. The Aussie fell 11 percent to end last year at 72.86 U.S. cents.
Back in December 2013, when the Aussie was trading near 90 cents, Stevens said that a level of about 85 U.S. cents “would be closer to the mark” than 95 cents. Toward the end of 2014, with the local dollar above 80 cents, he said about 75 cents would be better than 85.
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“If there is some sort of understanding that ‘Thou shall not talk down thy currency!’ I could argue that the RBA is probably about the only central bank that’s honored that commitment,” said Ray Attrill, co-head of currency strategy at National Australia Bank Ltd. in Sydney. “The U.S. has been as guilty as anybody in saying or doing things with the intention of weakening the currency.”
Australia’s dollar bought 75.74 U.S. cents as of 11:29 a.m. in Sydney and has climbed 6.1 percent this month.
“In a September 2015 Board statement on Australia’s Article IV, the OUSED expressed concern over the authorities’ public statements on the desired direction of the exchange rate,” according to the Treasury statement. “The OUSED urged the authorities to avoid statements that could be perceived as inconsistent with their international commitment to a market-determined exchange rate.”
The announcement suggests that Stevens won’t spend much time talking about the currency on Tuesday in Sydney at a speech, said Commonwealth Bank’s Grace. The report “also has potentially broader implications” for central bankers in Europe, Japan and New Zealand, “who have also used such tactics to lower their currency in the past,” he said.
(Adds Australian officials declining to comment in fifth paragraph, analyst comment in 10th.)
–With assistance from Michael Heath and Jason Scott To contact the reporter on this story: Candice Zachariahs in Sydney at firstname.lastname@example.org. To contact the editors responsible for this story: Garfield Reynolds at email@example.com, Tomoko Yamazaki
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