Friday, March 01, 2013

What the Reserve really thinks. The Aussie is 5 cents overvalued

But on business investment, there are green shoots

The Reserve Bank believes the Australian dollar is around 5 cents overvalued, but is considered likely to leave interest rates on hold this month after better than expected news on business investment intentions.

The Bureau of Statistics survey showed mining investment slipped 2.9 per cent in the three months to December, manufacturing investment fell 2 per cent and investment by services firms slid 7.5 per cent.

When asked about their plans for the coming financial year mining firms were 12 per cent more downbeat than a year ago and manufacturing firms 23 per cent more negative. But services firms - regarded as the most responsive to interest rates - were 5 per cent more positive.

“Manufacturing is a disastrous story whichever way you look at it,” said Westpac chief economist Bill Evans. “The slide is the biggest we’ve ever seen. But planned investment by services companies is four times as big and is set to climb. These are companies putting in warehouses or showrooms.”

Mr Evans had been expecting an interest rate cut at the Reserve Bank board’s next meeting on Tuesday, but he now thinks there won’t be one until June when the next set of investment figures are out.

The dollar slipped half a cent to 102.4 US cents on the investment news before climbing back to 102.8 as traders shifted their focus from actual to expected investment.

HSBC Australia chief economist Paul Bloxham said while the peak in mining investment was approaching, the drop off looked like being more gentle than had been feared...

“The fear was that you might get a projection which suggested you were going to get a sharp drop off, but these numbers suggest it is going to be more of a plateau,’’ he said.

A near-record $152 billion of business investment is expected in the coming financial year, $100 billion from mining.

Freedom of Information documents released Thursday show the Reserve Bank believed the Australian dollar was about 7 per cent overvalued in December. At the time the Australian dollar was trading for 105 US cents, meaning the Bank believed it should have been worth around 98 US cents.

But Bank staff had little confidence in the estimate saying they could only be 70 per cent confident the the dollar was somewhere between 4 per cent undervalued and 12 per cent overvalued.

While there had been a “clear and credible case” for Switzerland to intervene to stem the rise in its currency the circumstances in Australia could “not yet be considered comparable”. Switzerland relied heavily on manufacturing exports, had been facing deflation, and traded heavily with Europe.

Shadow Treasurer Joe Hockey backed the Reserve Bank Thursday holding out no prospect of the Coalition supporting intervention to restrain the dollar.

“There is no doubt that the high dollar is impeding the competitiveness of Australian exporters,” he told a business audience in Brisbane.

“But on the other side of the coin, the high dollar brings benefits for businesses which rely on imported goods, and for consumers who purchase cheaper imported products.”

“Those who argue for a lower dollar are effectively arguing in favour of higher prices for consumers – at a time when many households are under extreme financial pressure from rising electricity prices and now the government’s carbon tax.”

In today's Sydney Morning Herald and Age

From the RBA, under FOI:

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