Australian dollar is overvalued, Stevens toys with the idea of a currency market intervention

Stevens confirmed he believes the Aus dollar is overvalued, although he admits that quantifying the extent of the overvaluation is difficult.  

Stevens said, "in the end it is not possible to come to a definitive assessment on the extent of currency misalignment at the moment, on the basis of standard metrics (and having regard to the statistical imprecision of such metrics). Having said that, my judgement is that the Australian dollar is currently above levels we would expect to see in the medium term."

Stevens went on to say, "notwithstanding that, in my view, the Australian dollar is probably above its longer-run equilibrium at present, it is far from clear that we can assume that the mean level we saw in the 1980s to the early 2000s will be the relevant one in the future."

Traders sold the Australian dollar on the acknowledgement by the Governor that he remains open minded about intervening in the currency market, even as he said there is no prospect of any near-term intervention.

Stevens noted that while previous episodes of intervention had been profitable, the Bank was now much less confident about the level that the currency would eventually move back towards, and so consequently it was less certain now about the profitability of intervention.  

The cost of intervening had to be considered and intervening against the AUD in the recent period would have involved selling (relatively) high yielding Australian assets to buy low yielding foreign assets.  

This cost would effectively be borne by the taxpayer.  

So the "idea should be considered in a cost-benefit setting" and "overall, in this episode so far, the Bank has not been convinced that large-scale intervention clearly passed the test of effectiveness versus cost."

He went on to say, however, that "that doesn't mean we will always eschew intervention. In fact we remain open-minded on the issue."