Aussie dollar just won't stay down

Despite admissions that the Reserve Bank of Australia (RBA) is selling the Aussie dollar, the little Aussie battler just won't stay down. Last time I blogged on the Aussie dollar, just over a month ago  (4 October 2012),  the Aussie was at 1.023. Today (Friday 9 November) it is at 1.0426, despite a 25 basis point cut in the cash rate to deter investors. The Aussie dollar has gone up, instead of down, as it was supposed to do.

As I predicted in my last post "Aussie dollar unlikely to collapse", there are a variety of reasons why the A$ will stay strong, not least the fact that the Federal Government is locked into structural deficits of $122 billion between 2013 and 2016. The government's spending plans are sheer lunacy. At a time of tightening revenue, the ALP has announced a $10 billion disability support plan (it was $1 billion when they tried to sell the plan to the States, but it grew) and a multi billion dollar universal dental plan. I developed the habit of asking my friends in the ALP "how many billions did they spend today?"  

After the farce of the mining tax, which raised no revenue at a time which the Gillard government alleges is the height of the mining boom, what other piggy banks can they raid? A rise in the GST is the next cab off the rank, though the Greens are unlikely to obligingly commit political suicide to pass the tax, as the long-dead Australian Democrats did with the GST.

Faced with a strong dollar which is killing off what remains of Australian manufacturing industry, RBA Governor Glenn Stevens is desperate to get the A$ lower, but the tools he can use are limited. Apart from annoying traders by intervening in the FX market, he can cut rates again, but that would be about the last shot in his locker. A rate below 2.75% is getting into desperation territory. It's amazing how just about every market economist in Australia can misjudge the RBA's intentions so frequently. Governor Stevens is no doubt taking into account that  a further rate cut is likely to encourage another housing bubble, and with housing affordability already heading into the political danger zone, another rate cut this year is no certainty.

The Aussie dollar has become a de facto reserve currency as central banks diversify away from the US$. Press reports indicate that the Swiss central bank, which is holding in excess of US$400 billion in reserves, which it has bought to keep the franc down, has been buying Aussie dollars direct from the RBA to minimise upward pressure on the Aussie dollar. While the US$ remains shaky and Australian fundamentals look relatively sound,, central banks can be expected to keep buying the Aussie dollar as a diversification from the US$ and the Aussie dollar will remain under upward pressure. There's not much the RBA can do about this.