The Reserve Bank of Australia's governor, Glenn Stevens, spoke at the ASIC Annual Forum today. Many were speculating he was going to use this as an opportunity to attempt to jawbone the Australian dollar.
This comes at a time when the Reserve Bank of Australia has come under criticism from the U.S. Treasury for talking down the Australian dollar. The U.S. Treasury has expressed its concern over the move, suggesting it has breached international commits by not allowing the market to operate freely. The complaint was made at an IMF review in September, but made public this week.
Australian media didn't seem to take kindly to this news, hinting at a touch of hypocrisy from the U.S. Treasury which effectively controlled the U.S. dollar through eight years of near-zero interest rates and a $4 trillion bond buying stimulus program.
Perhaps it is because of this news that governor Glenn Stevens bit his tongue somewhat at the ASIC Annual Forum earlier today. He said:
"The fact that Australia has a sound and credible macroeconomic policy framework, which could, if needed, respond as appropriate to significant negative events is also a good starting point. Even with interest rates at already low levels, and public debt higher than it was, there would, in the event of a serious economic downturn, be more room to ease both monetary and fiscal policy than in many, indeed most, other countries."
Sourced from DailyFX
The lack of any form of jawboning caused the Australian dollar to climb against the U.S. dollar after several days of small declines. This was a bit of a disappointment, but understandable given the circumstances leading up to the meeting.
Can the Reserve Bank talk down the Australian dollar?
Following the complaint, we do feel it is going to be difficult for governor Glenn Stevens to talk down the Australia dollar. This could explain why a number of other board members have been expressing their opinions on the Australian dollar in recent times. In February board member John Edwards suggested the Australian dollar was too high and would be more comfortable with it being all the way down at 65 U.S. cents.
Interestingly, the world's biggest fund manager BlackRock today stated its belief that the Australian dollar is heading down to the 65 U.S. cents mark. Its Australian head of fixed income Stephen Miller said the following about the Australian dollar's movements:
"The Aussie dollar is a volatile currency, it's sometimes a case of five steps down and two steps up. We're in the two steps up phase and the next phase will be the five steps down phase."
Mr Miller has predicted the currency will fall to 65 U.S. cents and possibly lower by the end of the year. His view is more bearish than the median forecast for the Australian dollar to end 2016 at 70 U.S. cents.
We do agree with this view of five steps down and two steps up, and believe it can be seen in many respects on the chart shown below which tracks the Australian dollar's fall against the U.S. dollar since 2012.
Sourced from DailyFX
We are still confident on the Australian dollar dropping to 65 U.S. cents.
We have always maintained that the Australian dollar will drop down to 65 U.S. cents and still believe it to be the case today. When the Federal Reserve does in fact begin lifting rates again it will almost certainly cause the Australian dollar to depreciate. Rate cuts by the Reserve Bank of Australia will further compound these declines.
Of all the times to short the Australian dollar, now is potentially the best time. We feel with the market lowering expectations on the Federal Reserve's rate rises this year to a very achievable level, there should not be any further surprises in store for the Australian dollar. We're not going to be bold enough to say it has now peaked, but we will say that we feel it could not possibly go any higher than 78 U.S. cents.
When you look at the risks compared to the rewards, this is an encouraging trade. The downside risk is the Australian dollar climbing 2.6 percent to 78 U.S. cents, but the upside is a potential 14.5 percent drop to 65 U.S. cents.
Although we use futures contracts for our trades, investors can achieve similar results by using the CurrencyShares Australian Dollar Trust ETF (NYSEARCA:FXA). Those which are even more confident in a decline in the Australian dollar can use the ProShares UltraShort Australian Dollar ETF (NYSEARCA:CROC). Please remember, though, that with CROC it is two times the leverage and two times the losses should things go against you.
All the best, and good luck with your trades!
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: We are short the AUD versus the USD via futures contracts