Australia’s central bank Governor Philip Lowe did not make it to last month’s federal reserve annual summit in Jackson Hole, Wyoming. But judging from the buzz at central banking’s answer to Davos, Lowe will be dealing with the fallout from those discussions 8,000-plus miles away for some time.
Even before the central bank chiefs of the US, Europe and Japan- Janet Yellen, Mario Draghi and Haruhiko Kuroda—arrived in the heart of Grand Teton National Park on Aug. 24, their Australian counterpart was fretting over a 10% appreciation in his currency this year. Reserve Bank of Australia Governor Lowe warns it is eroding competitiveness and denting the outlook for employment and domestic output, Nikkei reported.
Things may be about to get worse. While Kuroda was the only major central banker to speak bluntly about interest rates in Jackson Hole, US and European officials are also engaged in a not-so-stealthy effort to weaken exchange rates. As Kuroda told Bloomberg, Japan’s recent 4% growth spurt was an aberration. “I think for some time we have to continue this extremely accommodative monetary policy,” he said.
In the central banking world of winks, nods and secret handshakes, that is a code for the yen should be lower. European Central Bank President Draghi, in word and deed, favors a softer euro to support exporters. Washington is thinking along the same lines. The quest for a lower dollar is being led by Donald Trump’s administration, one threatening trade wars and playing politics with the couple of AAA ratings it has left.
This is not quite a return to the currency clashes that shook global markets, say, in 2013. It is more of a policy Cold War between authorities dying to devalue, but treading carefully for fear of transporting markets back to the chaos of 2008. Expect this race to the bottom to intensify once China reenters the fray, as President Xi Jinping is almost certain to do to keep gross domestic product moving. Ultimately, this dynamic will be swirling well into 2018.
All smaller advanced economies, like Australia, can do as this brinksmanship plays out is to batten down the hatches and get their own houses in order. That is easier said than done, as Lowe’s plight demonstrates. Should, for example, the RBA be cutting interest rates at the moment or raising them? The answer: Yes.
