Australian Dollar Expected To Fall Lower By Central Bank Gov. Stevens

The Central Bank Governor of Australia, Glenn Stevens said the Australian dollar will likely drop that increase as the current costs and productivity do not support the existing level of exchange rate.

In his remark at the Citi’s 5th Annual Australian and New Zealand Investment Conference, Steven said, “These levels of the exchange rate are not supported by Australia’s relative levels of costs and productivity. Moreover, the terms of trade are likely to fall, not rise, from here. So it seems quite likely that at some point in the future the Australian dollar will be materially lower than it is today.”

According to Stevens, another area that investors perhaps should take care is the foreign exchange market. He noted that the response of exchange rates to some recent events was understandable, but the levels were unusually high.

The Australian dollar reached its highest level in four months this October. Over the past three years, the currency traded to almost historic high levels against the U.S. dollar, according Market Watch. Concerns that the strength of Australian dollar could halt the export growth in non-mining sector re-emerged after the recent currency gained that was followed by a multi-month decline.

Stevens also emphasized that the high exchange rate has a significant impact on the balance sheet of the Reserve Bank of Australia (RBA), which led to the decline of its foreign assets and capital below the practical level.

“Our annual reports have made quite clear over several years now that, while this rundown in capital in the face of a very large valuation loss was exactly what such reserves were designed for, we considered it prudent to rebuild the capital at the earliest opportunity,” according to Stevens.

He added, “It has been clear that the Bank saw a strong case not to pay a dividend to the Commonwealth during this period, preferring instead to retain earnings, so far as possible, to increase the Bank’s capital.” According to him, RBA intends to rebuild its capital this year, which will strengthen its balance sheet and will likely allow the resumption of a regular flow of dividends to the Commonwealth earlier than anticipated.

The Australian dollar decline from US$0.9575 to US$0.9530, its lowest rate since October 17 after Stevens delivered his speech.

Stephen Walters, chief economist of JP Morgan Chase & Co. (NYSE:JPM) commented that Steven’s remarks were jawboning to get the Australian currency go down, and the strategy worked. He added, “They want it a lot lower than this, which to me suggests in the 80s somewhere.”