Still, in the clubby atmosphere of G-20 central banking, this move only highlights the tension beneath the calm exterior of the currency markets.
The Reserve Bank of Australia kept its benchmark rates at the 2.00% level, as expected. However, its statement showed some frustration with the Fed. The Australians are clearly piqued by the persistent dovishness of Janet Yellen’s policy.
In its monthly statement, the RBA noted that the Australian economy continued to rebalance away from mining and that the recent appreciation in the Aussie dollar was partly due to a rise in commodity prices. The market saw this as hawkish, as officials in Sydney clearly see no reason for any intervention at this point.
|The Reserve Bank of Australia keeps an eye on the Fed.|
However, in a reference to the Fed, the RBA said that “monetary developments elsewhere in the world have also played a role” in keeping the Aussie elevated. The statement concluded that “under present circumstances, an appreciating exchange rate could complicate the adjustment underway in the economy.”
This unusual move shows some discord among the G-20 officials, since the Fed’s dovish stance is creating unwanted appreciation in many major currencies.
The Aussie dollar initially popped higher on the news, as the RBA signaled that it will remain stationary with respect to exchange rates for now. Yet officials in Sydney are clearly becoming exasperated by U.S. monetary policy, which is driving carry-trade flows into the relatively high-yielding Aussie. The 0.8000 level will now become “The Maginot Line” for the currency, after which the RBA may become much more aggressive in its efforts to drive exchange rate lower.
The Fed’s dovish stance is also pushing up other currencies, such as the yen. The dollar fell below the key 110-barrier this week, and it was only verbal intervention from Japan’s Chief Cabinet Secretary Yoshihide Suga that halted the yen’s appreciation for the time being. Suga noted that the Japanese government was watching FX rates with a “sense of urgency” in a clear attempt to halt the yen’s rise.
|“Other central banks are not going to stand idly by as the Fed dilly-dallies.“|
Just as their Australian counterparts, Japanese officials are clearly concerned with Fed’s dovish posture, which has resulted in yen strengthening from above the 120 level to the current 110 mark since February.
With most of the Japanese corporates hedged near the 115.00 rate, the appreciation in the yen further toward the 100-mark is likely to weigh on exports going forward and could wreak havoc with BOJ’s efforts to generate inflation and stimulate growth.
Yet despite the frustrations of Japanese officials, market sentiment continues to favor lower USD/JPY moves. With yield curves in G-3 (U.S., Japan and euro) continuing to flatten, the downward pressure on the pair remains and that means that other central banks are not going to stand idly by as the Fed dilly-dallies.
If the dollar continues to weaken, we may very well see unilateral attempts at intervention as other G-20 central banks try to retake control of currency exchange rates.
Prepare for more volatility ahead as the currency wars are just starting.
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The Money and Markets team