Get Ready to Watch the RBA Back-Pedal

Happy central bank manipulation day!

Those living in the fog of the mainstream, though, would simply refer to today as the first Tuesday of the month.

Today, over scones and coffee — or chai lattes and glutton free pastries, if that’s their thing — the Reserve Bank of Australia will meet. Once more, they’ll make a decision on what to do with the cash rate.

The widely anticipated outcome is that they won’t make any rate changes.

Perhaps, they’ll sit back, scoff some pastries, and decide that, nah, they won’t move Australia’s cash rate.

You’d like to think I’m joking. That our central bankers take their lever-pulling in our economy a little more seriously than a free morning tea once a month.

However, it’s hard to be the RBA’s cheerleader when you and I are the ones living in the economy they fiddle with.

Living with the cheap credit that’s contributed to our having two (Melbourne and Sydney) of the world’s top 10 most expensive cities to live in.

The same economy in which the Australian Bureau of Statistics swears inflation is running at 1.9% year on year. Yet you know yourself that each month there is not as much money left over as the one before.

The very same economy where your savings earn less and less interest each year. Leaving you with few options to protect yourself from inflation and chase higher returning investments.

Yeah, that economy.

So what can we expect from today’s meeting? It’s widely anticipated that the cash rate will remain at 1.5%. I reckon the press release this afternoon will be the usual snore. ‘House prices softening, but complex. Wage grow low, but is forecast to rise in a set year. The international markets are showing signs of strength.’ You know, the stuff central bankers like to use metrics for which rarely match up with an ordinary person’s day to day experience.

What might be different this time, is if they touch on the hissy fits the market threw only two weeks ago.

Did you miss it? Let me recap it for you…

The RBA release their June monthly minutes two weeks after the official rate meeting. Because of this, 11am Tuesday 18 July 2017 will be remembered as the moment Australian traders completely lost their marbles.

For the month of June, the Reserve Bank of Australia wrote in their minutes what a return to normal interest rates could look like. They said:

Members discussed the Bank’s work estimating the neutral real interest rate for Australia. The various estimates suggested that the rate had been broadly stable until around 2007, but had since fallen by around 150 basis points to around 1 per cent. This equated to a neutral nominal cash rate of around 3½ per cent, given that medium-term inflation expectations were well anchored around 2½ per cent, although there is significant uncertainty around this estimate.

Did you see that? The bit where they were saying rates were about to go up? No.

Did you read anything that said there was an estimated timeframe of when the RBA will start increasing rates? No.

Let’s take it one step further here. Has the RBA even implied that they’ll embark on a rate hiking mission? Err…no.

The quoted paragraph is the entire reason for some market participants losing their grip on reality, causing the Aussie dollar to nudge 80 US cents 48 hours after the media release. Here’s a snapshot of the market action:

AUD/USD hourly/two week chart

Source: CMC Markets
[Click to open new window]

Inside that oval, you can see the Aussie dollar jumping from 77.87 to 78.88 US cents. This 1.29% leap took less than two hours, but the Aussie dollar was 1.92% higher (79.37 US cents) by the time the UK market opened.

That oval is the point where market participants just piled in. And I can’t help but wonder just how much of this ‘pile in’ was mathematical trading.

The thing is, at no point did the RBA say they were going to raise rates. They hypothesised what a new ‘neutral’ cash rate might look like. Yet, there was absolutely no smoking gun. Punters and mugs alike jumped onboard the momentum.

What’s the saying, you’ve got to be in it to win it? Fools.

There’s a persistent fear in the markets that, unless you get on board with the trading momentum, you will miss out. Miss out on what exactly?

Very few of us outside the big banks trade currencies. And unless you were waiting for the meeting minutes to drop, you wouldn’t have had the time to make your trade for the big gains anyway.

Some investors can already see they took part in what was nothing more than a market temper tantrum.

However, it wasn’t until Guy Debelle, deputy governor of the Reserve Bank of Australia, poured cold water on the issue, that the broader market finally saw the insanity in the Aussie dollar rise. In a speech to businesses in a few days later, Debelle said:

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. No significance should be read into the fact the neutral rate was discussed at this particular meeting.

Doh! There was ‘no significance’ to the fact the neutral rate was discussed.

The overreaction for the currency adds to the desperate psychology of the market at the moment. There is a perpetual fear of missing out. That every bit of news should be read, interpreted and acted on.

Nonetheless, that hasn’t stopped the mainstream media blaming everyone else. The Sydney Morning Herald wrote five days after the June minutes were released:

‘We know that the Reserve Bank of Australia has back-tracked on its July meeting minutes to an extent, with deputy governor Guy Debelle on Friday signalling the markets over interpretation on the nominal neutral rate of 3.5 per cent and the view this could signal the cash rate was going higher. While fading the AUD rally into Debelle’s speech was perhaps a fairly clear trade (at least in hindsight), it still seems so bizarre that the RBA would throw out such numbers and rhetoric and not expect the market to explore them in such depth.’

Let’s get it clear here. The market did no exploring. The market didn’t chew the numbers over. There was no time to digest them. Punters just blindly followed one another in. Or the computer algorithms did. Possibly both.

The market had a meltdown over an inconsequential statement.

So much so, that if the forex market was much smaller and easier to manipulate I’d be calling it a pump and dump trade…because the event was, well, odd.

The problem is, in the two weeks since the hissy fit, the Aussie dollar has remained stubbornly high at 79.70 US cents. Which is not where the central bank wants it.

So, you know what you can expect from the RBA this afternoon? Some noise to talk down that Aussie dollar, for starters.

Most importantly, settle for the back-pedal from the central bank. I reckon they’ll alter their language to undo the ‘normal’ rate talk that caused the markets to throw a hissy fit two weeks ago.

Kind regards,

Shae Russell,
Editor, Currency Wars Trader

Since starting out in the financial markets over a decade ago, Shae has extensive experience across various aspects of the industry. Shae cut her teeth in the derivatives industry, teaching clients basic trading techniques with technical analysis.

Joining Fat Tail Investment Research eight years ago, Shae has worked across a number of publications, such as Australian Small-Cap Investigator, Gold Stock Trader and Microcap Trader. She’s spent the past two years however, honing her macro analysis skills alongside Jim Rickards, showing Australians how to invest and profit form global macro trends.

Drawing on her extensive experience, Shae is a contributor to Money Morning, and lead editor of sister-publication Markets & Money, where she looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.

Money Morning Australia