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Make no mistake, the unwinding of unconventional monetary policy is a good thing long term; however it will cause short-term vibrations. This can already be seen with US ten-year bonds rising to 2.87% overnight - the highest level post the non-taper September FOMC meeting; positioning is ramping up, meaning it’s not looking good for precious metals and risk currencies like the AUD.
What the speculation is doing is raising the investment profile of the USD; with the dollar index rising 0.4% overnight, currencies and economies that have been struggling due to high exchange rates will start to benefit in the medium term.
The issue though for countries outside the US is judging when monetary stimulus is going to be unwound. That is why Glenn Stevens is using every tool in his arsenal to move the biggest drag on the Australian economy - the AUD.
Since moving interest rates to the lowest level on record in August, the RBA has been reluctant to use this blunt monetary tool. Instead, it has decided to use more targeted language measures to try to hold it down until the Fed finally slows the printing presses.
The market is well aware that the RBA is jawboning; October was the first time the currency markets had really heard him aggressively talking down the AUD to the Chamber of Commerce, and since then they have not been caught off guard so easily and have tried to call his bluff.
He has now taken the next step in the fight, with the high AUD with a press drive. The interview with the Australian Financial Review has certainly helped the AUD drop below the 90 cent handle. It is these statements that show he is still looking for avenues to push the currency lower:
‘I thought 85 U.S. cents would be closer to the mark than 95 cents… if things over the medium term evolve as we’re presently assuming -- and I think it’s reasonable to make these assumptions -- it’s going to be surprising if a nine at the front is the right number.”
I have to say, this is a master class in how to finesse policy in a way that targets the bank’s core concern without altering the overall position of the RBA.
Stevens is well aware that the export community is screaming out for help, and this can been seen in the terms of trade, confidence numbers and on a bottom-up views. This is a brilliant example to the globe of how a smaller economy can navigate what will be an interesting 12 months by pressing on unconventional levers.
We saw in August what is likely to happen to emerging market once the Fed moves. Nations like India, Indonesia, Korea and Malaysia - all major trading partners for Australia - are likely to come under pressure. If the AUD falls with these national currencies, Australia will have a significant advantage over its developed competitors, which some exporters need desperately.
So watch Stevens over the coming days and weeks; he is constructing a perfect platform and debate around the local currency is one that he is currently winning. The way he is constructing the debate suggests he is in for the long haul, meaning any move in the short term from the Fed is a clear win.
Ahead of the Australian open
It looks like the ASX is in for a seventh consecutive day in the red; US sentiment has switched and profit taking is dragging on the US markets, and this is heaping even more pressure on the ASX that has already contracted 2.4% this week and 395 points since the October top.
Ahead of the open, the ASX 200 looks like contracting to 5043, seeing another 19 points out of the index. BHP’s ADR is suggesting the miner could stem the bleeding, having fallen 4.2% this week and over 7% since the high in November to add 24 cents to $35.78, even though iron ore dropped out of the US$139 a tonne mark.
It will be a very quiet trading day today as investors start to take holidays and position themselves for the FOMC meeting come Wednesday; price action will be slightly volatile.