So earlier this week, the aussie grabbed some headlines after soaring to a two-year high on RBA minutes that the market saw as particularly hawkish.
Specifically, traders keyed on these two sentences from the minutes:
- This equated to a neutral nominal cash rate of around 3.5%, given that medium-term inflation expectations were well anchored around 2.5%
- Quarterly growth was expected to have increased in the June quarter, despite the disruptions to coal export volumes following Cyclone Debbie
That first one about the neutral rate was key. And as soon as the market got a hold of it, this is what happened next:
Ok so again, that was earlier this week and that move was turbocharged by concurrent dollar weakness tied to the failure of the GOP healthcare bill. The sharp move higher had shorts scrambling to cover as leveraged accounts holding short AUDUSD positions were forced to square them up through 0.7810, an Asia-based FX trader remarked.
Fast forward to Friday and the RBA’s Deputy Governor Guy Debelle is doing some damage control (after all, what we got this week in the aussie really amounted to a hike that no one wanted).
“There was a discussion of the neutral rate at the most recent board meeting, as detailed in the minutes of the meeting released earlier this week,”Debelle said, in the text of a speech in Adelaide, “no significance should be read into the fact the neutral rate was discussed at this particular meeting.”
That’s unequivocal. And the aussie reacted as such, plunging the most since May 3:
And in case there were any doubts, Debelle also said this: “While an easier monetary policy elsewhere in the world should lead to faster growth in the world economy, which is good for the Australian economy, an appreciating exchange rate works against this.”
“Debelle smashed two arguments in one sitting. Two birds, one stone,” Jarrod Kerr, senior interest-rate strategist at CBA in Sydney mused.
There you go. Indeed, given the rather blatant attempt to jawbone this lower and given how far we’d already run, it’s a wonder AUDUSD recovered as well as the chart above shows that it did.
The Australian yield curve promptly bull-steepened as yields on the 3Y (that would be the same 3Y that people were selling the holy shit out of earlier this week) plunged as much as 9 basis points, in the steepest slide since November. As Bloomberg writes, “the probability that RBA will raise its policy rate in February sild to 33.0% from 45.9% Thursday.”
And then there was this (again, from Bloomberg):
- Prior to Debelle’s speech, Australia sold A$500m of December 2021 bonds, which drew the highest coverage ratio since the debt became available in January.
- The note is included in the basket that underlies 3-year bond futures.
- Demand was strong because the debt was a basket bond, became cheaper after recent selloff and there is a lot of cash around after redemption of bonds and coupon payment from Queensland Treasury Corp. debt
Still, the RBA has a problem.
Namely that the aussie quickly recovered and the big picture still looks like this: