At some point, the Reserve Bank of Australia (RBA) will accept that if it really wants its currency to sell-off and stay down, it will have to be much more direct about its intentions. The tradition of talking down one's currency is now well-established from the Bank of Japan to the Swiss National Bank to the Bank of England and even the Federal Reserve. The European Central Bank would try to talk its currency down if it was not more fearful of a market overreaction tat prices in a collapse of the euro itself.
In Monday's minutes (Tuesday Australia time) of the May 7th policy meeting, the RBA provided no direct smoking gun to explain what I called at the time a mystifying rate cut. The minutes begin on a relatively optimistic note on expected economic growth rates:
Members noted that global economic data released over the past month had been somewhat mixed. Overall, the data suggested that the pace of growth in Australia's major trading partners had eased early this year, although the outlook was still for around trend growth in 2013 as a whole, before picking up in 2014.
…and the minutes contain numerous references to the positives in the Australian economy, reflective of what I pointed out last time as Australia's "high class problems."
However, the minutes DO contain important references to the high exchange rate. It is like a not so subliminal message encouraging traders to sell the Australian dollar (FXA) short:
Apart from the yen, exchange rates generally had been little changed, with the Australian dollar remaining high by historical standards despite depreciating a little against most currencies…
…The near-term forecast reflected the slowing in overall business investment, given the peak in the mining investment boom along with the effects of fiscal consolidation and the high level of the exchange rate…
…conditions in the business sector, as assessed in surveys, generally had remained below average, possibly in part because the exchange rate had remained high despite lower export prices and interest rates.
The budding theme seems to say that the high exchange rate is depressing business sentiment and activity. Given Australia's domestic economic issues revolve around business activity (emphasis mine)…
Domestically, the data on economic activity since the previous meeting had not materially changed the earlier staff forecasts. A range of indicators pointed to a pick-up in spending by the household sector, conditions in the housing market remained generally positive and measures of consumer confidence had been above average. In contrast, measures of business conditions had remained below average and business investment outside the resources sector was expected to remain subdued in the near term. Employment growth had remained moderate and the unemployment rate had edged a little higher, which had been broadly as expected.
…it stands to reason that the "scope to ease rates" which the RBA uses as license for cutting rates is really about about trying to push the exchange rate down.
After the minutes were released I tweeted "No surprises in #RBA minutes. Still looks like a premature rate cut, but all about $AUDUSD rate. No clear reason for more cuts at this level." Also no surprise then that selling in the Australian dollar reversed after the release of the minutes:
A swift recovery after release of RBA meeting minutes
Overall, I think the Australian dollar will stabilize soon given the lack of further catalysts to go much lower. There are several points to consider though…
The current slide in AUD/USD just happens to correspond with the beginning of trading on April 10th in the Australian dollar against the Chinese RMB. On that day, the Australian dollar printed a false breakout from a downtrend that has been in place since the historic highs in 2011. Could it be after an initial rush of enthusiasm, traders on the Chinese exchange started selling Aussie as hedges on Chinese steel production, exports, etc? Also on the technical side, AUD/USD is rapidly approaching a retest of last year's low.
The Australian dollar reaches for a major retest after trading in the currency starts in China
This technical retest of the lows from June is important because according Marc Chandler's read of the CFTC numbers: "The 36% rise in gross short Australian dollar positions to a record 75.1k contracts was sufficient to switch the net position to the short side for the first time since last June. Nevertheless, the gross long position remains the second largest among the currency futures, behind the Mexican peso." In other words, the short bets are likely just hedges on long bets. And these short bets may have reached the climax that they reached last year.
Finally, iron ore prices continue to slide. Australian iron ore with 62 percent iron content is trading around $125/tonne, a five-month low. Iron ore was at 16-month highs at $158.90/tonne just three months ago. That peak capped a rally off of major lows late last year just under $90/tonne. The price swings have been volatile and swift…and little correlated to movements in AUD/USD until now. It is likely the synchronized slide is getting more scrutiny and any recovery in iron prices from here should translate quickly into a higher Australian dollar.
In the meantime, I am maintaining a net bearish position. I will likely close out with either a convincing break and recovery above parity or a retest of last year's low.
Be careful out there!
Additional disclosure: In forex, I am net short the Australian dollar.