Late last year, the Reserve Bank of Australia (RBA) undertook a jawboning campaign designed to push an already declining currency even lower. The central bank believes a lower exchange rate will boost export activity and spur growth for the country's non-mining sectors.
At the time, RBA Governor Glenn Stevens proceeded from characterizing the level of the exchange rate as "uncomfortably high" to noting "that foreign-exchange intervention can, judiciously used in the right circumstances, be effective and useful."
That latter observation was particularly noteworthy because, according to The Wall Street Journal, a currency intervention has essentially been verboten in the decades since Australia shifted to a floating exchange rate in 1983.
Of course, this type of rhetoric only works in the short term, as larger factors, such as the actual course of monetary policy, or at least expectations concerning its trajectory, along with commodities prices, will drive the exchange rate in the long term.
Indeed, while the Australian dollar did fall in the wake of these earlier remarks, with the currency hitting a three-year low of USD0.868 in late January, the aussie has since rallied sharply. The currency recently traded near USD0.936, up about 7.8 percent from the aforementioned low.
Although the RBA soon dropped the "uncomfortably high" language from its monetary policy statements, the central bank almost certainly views the present level of the currency in similar terms, since it now trades at around the same level as when Mr. Stevens launched his last jawboning campaign.
This time around, however, the RBA is trying to be more judicious, as the WSJ puts it, in its use of language toward this end. In a speech this week before the Econometric Society Australasian Meeting and the Australian Conference of Economists, Mr. Stevens took pains to explain the evolution in the language used i! n these monetary policy statements.
Interestingly, he did not attribute any of the aussie's decline to any wording in the bank's policy statements, but instead asserted that it was more likely due "to a change in mood in global capital markets."
Mr. Stevens noted that the RBA subsequently altered its language to reflect that decline, and then adjusted it once more as the currency began to rise again.
Nevertheless, he observed investors' strong focus on whether the adjective "uncomfortable" will be employed once again in future statements, noting that he doesn't regard its absence to be as significant as many central bank watchers believe.
Still, Mr. Stevens acknowledged that even if the bank itself doesn't always ascribe great significance as to its choice of wording, it realizes that both economists and investors carefully parse its statements, so considerable care is still required in drafting them. Additionally, there are limits to what jawboning can achieve.
"We have tried to avoid frequent and large language shifts about the exchange rate," he said. "It can vary enough from month to month that we risk chasing our tails if we seek to engage too actively in 'jawboning' each month."
But then he proceed to do just that by stating that the exchange rate is still high by historical standards, and that there is little doubt that firms dependent on foreign trade find it quite uncomfortable.
Furthermore, he said that when judged against current trends in the terms of trade and Australia's relatively high costs of production, the aussie remains "overvalued, and not by just a few cents."
He closed his remarks on this particular topic with an even more overt statement: "Nonetheless, we think that investors are under-estimating the likelihood of a significant fall in the Australian dollar at some point."
Where would the RBA like to see the exchange rate? Based on past remarks, that level is most likely in the low USD0.! 80s. But ! according to Bloomberg, the consensus forecast among economists doesn't show the currency falling to USD0.85 until 2018. For now, the aussie is expected to trade at an average of USD0.91 for the remainder of 2014.
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