AUD and Yellen’s Curse - Rabobank
Jane Foley, Research Analyst at Rabobank, sees greater likelihood that
US officials may have pressured other central bankers to step back from
currency wars rather than attempt to secure an agreement specifically
targeting the value of the USD.
Key Quotes
“Yellen
recently publically admitted that the FOMC had not anticipated the
extent of the USD’s rise during the H2 2014 and we would argue that this
appreciation had a not insubstantial impact in slowing the need for
rate hikes from the Fed this year. A second factor supporting the
conspiracy theory is the indication from ECB Governor Draghi last month
that he didn’t see room for further rate cuts – the main weapon in a
currency war.
While Draghi appeared to be walking away from the
currency war last month, it is still a stretch to believe that this
decision was triggered by a request from the Fed not to push the USD
higher.
A third factor related to the conspiracy theory comes
from the reports in late March that the US executive director on the
IMF’s executive board had levelled a complaint about the RBA’s “public
statements on the desired direction of the exchange rate”. It is common
for the RBA, along with the RBNZ and SNB to attempt to ‘jawbone’ their
currencies lower. None of these banks are G7 members and so none have
signed up to numerous G7 communiques that favour market pressures in the
setting of exchange rate values.
A common theme is that these
three central banks have been contending with currencies which have been
overvalued on several measures for many years. While there is some
defence to the use of verbal intervention by these specific central
banks, this compliant from a US official nevertheless highlights the
degree of disgruntlement in the US with respect to the strong dollar.
Although
it is the Treasury rather than the FOMC that officially sets USD
policy, the dovish commentary from Fed Chair Yellen does fit with the
notion that the US central bank is no longer willing to be a passive
victim of currency wars. While a combination of dovish comments from
Yellen and conspiracy theory talk is weighing on the greenback, there
has been a gradual reduction of long USD positions for some months
suggesting that further USD declines may be tough given that the Fed is
signalled that it is still likely to hike rates this year.
While
we do expect the USD to recover some ground in the coming months, the
recent weakness of the USD does raise the chance that some other central
banks may ease further to prod their currencies lower. BoJ Governor
Kuroda last morning warned of further easing and while the RBA left
policy steady as expected, it made clear it is unhappy with the recent
AUD rally. Casting aside criticisms from the US, the RBA stated that
“under present circumstances, an appreciating exchange rate could
complicate the adjustment under way in the economy”. We expect AUD/USD
to weaken to 0.73 on a 3 mth view.”
(Market News Provided by FXstreet)
