Weekend Economists and the Accidental President December 13-15, 2013

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12. Aussie Dollar’s Longest Drop in 28 Years Driven by RBA Comments

http://www.bloomberg.com/news/2013-12-13/aussie-dollar-s-longest-drop-in-28-years-driven-by-rba-jawboning.html

The Australian dollar headed for its longest stretch of weekly losses since 1985, as the central bank head intensified his efforts to talk down the world’s fifth-most traded currency.

Governor Glenn Stevens signaled a weaker Aussie is preferable over lower interest rates to help spur the nation’s slowing economy. The Aussie touched a more-than-three month low of 89.14 U.S. cents after Stevens said a level of 85 cents “would be closer to the mark than 95 cents,” in an interview published in the Australian Financial Review today. The governor last month put markets on notice, saying, while the benefits of intervention haven’t “so far” outweighed the costs, it “doesn’t mean we will always eschew” currency sales.

“The RBA appears to have made a strategic decision in mid-October that they could get the Aussie down and they should try and get it lower as they downgraded their view of the resource sector,” said Greg Gibbs, a Singapore-based strategist at Royal Bank of Scotland Group Plc. “They have sent a message and the currency has reacted. The real risk by saying 85 cents is that the market feels more comfortable with the currency around current levels.”

Averting Recession

Architects of the float of Aussie in December 1983 have said the currency must devalue and economic reform be renewed to avert recession, after the currency’s strength spurred losses at Qantas Airways Ltd. and prompted manufacturers including General Motors Co. to close operations.