Ok, so on the heels of a soft CPI print that sent the Aussie tumbling, RBA governor Lowe delivered a speech in Sydney on Wednesday, and as expected, it was notable.
“Some central banks are now starting to increase interest rates and others are considering when to withdraw some of the monetary stimulus that has been put in place, [but] this has no automatic implications for monetary policy in Australia,” Lowe said, rebuking the notion that RBA policy is inextricably bound up with the policy maneuvers of other central banks.
Clearly, this was an overt effort to dispel the notion that a hike is imminent.
“His comments are as close as RBA is likely to get to implicitly acknowledging a low-for-long outlook for the policy rate,” JPMorgan rates strategist Sally Auld wrote in a note, adding that “rates clearly aren’t rising until RBA is confident wages growth and inflation are increasing, and there are few signs this is the case yet.”
Right. And the Aussie continued to decline throughout the overnight session following Lowe’s comments:
The probability of an RBA hike in May fell to 50.9% from 56.3% Tuesday.
It’s worth noting that the rally in the Aussie was looking pretty stretched headed into Wednesday:
Of course the downside here is capped by optimism about the global economy (Caterpillar earnings helped) and also by jitters about the USD and the stalled policy agenda in the U.S.
“This should take some heat out of thoughts about a near- term RBA rate hike, and the Australian dollar,” Peter Dragicevich, a currency strategist at Nomura Singapore, remarked, but “negative U.S. dollar sentiment continues to cushion the downside in the Australian dollar from domestic macroeconomic factors, so relative value strategies remain more attractive.”
Ok, but here was the really amusing part. This is what Lowe said about the possibility that overheating labor markets (ahem, America) could one day come back to bite central banks in the ass if they wait too long to normalize:
It is possible that things could change in the not too distant future, particularly in those countries at, or near, full employment. It may be that the lags are just a bit longer than usual. If so, we could hit a point at which workers, having had only modest pay increases for a run of years, decide that it is time for a catch-up.
If such a tipping point were reached, inflation pressures could emerge quite quickly. In this scenario we could see a period of turbulence in financial markets, given that markets are pricing in little risk of future inflation.
So there you have it Janet Yellen, that’s clearly directed at you.
Fortunately, you know what to do in that scenario, right?