Article / 24 May 2016 at 12:30 GMT

A central banker to be envied

Director / Accumen Management
United Kingdom
  • RBA's Stevens speaks candidly on inflation targeting mandate
  • Governor has enviable ability to manage market expectations
  • RBA has plenty of leeway to shave rates when it needs to

By Ken Veksler

The Reserve Bank of Australia and its governor, Glenn Stevens, are in the somewhat enviable and most certainly unique position of being able to “front run” the wider market. This became evident this morning when Stevens delivered a speech in which he spoke at length about the RBA’s inflation targeting mandate. 

What was previously a non-topic or at least one which was only muttered about behind closed doors has become a prominent tool by which to manage the market and its expectations around further rate policy in Australia. Stevens was anything but shy in mentioning the meandering inflation levels seen in Australia at present and the risk of these becoming even worse in the near and medium terms. A luxurious spot from which to speak when the cash rate is something like 125/150 basis points above the bank’s nearest counterpart and thus leaves substantial room with which to play into the perceived lower bound. 

In actual fact it’s not even about the cash rate as much as it is about using the FX transmission channel which takes its cue from rate differentials. Stevens has long argued for fair value of the AUD to be in and around present levels and while the recent momentum has been for a lower currency, why not strike while the iron is hot and get all the Last Minute Larrys excited about further downside. Stevens likely won’t act again in his current role, but it has been enough to display the willingness and justification to do so as to achieve the desired result.

For what it’s worth, I do still believe that downside pressure is the path of least resistance for the currency and certainly with an election on the horizon and meandering macroeconomic data leading the way, I don’t see this changing too soon. The disclaimer here for me though is that I only right now see perhaps another 1.5% downside from present levels, with anything further only seen should the USD leg become the prominent driver, especially if recent hawkish Fed rhetoric remains as ramped up as it has been heading into the June Federal Open Market Committee meeting.

The obvious resting place for AUDUSD is now around the 0.7000/30 area and it’s only the pace and method by which we get there that remains in question.

While other central bankers are hamstrung, the RBA has plenty of ammo left. Pic: RBA 

Otherwise this morning has firmly belonged to sterling, Bank of England governor Mark Carney and the whole merry band of the Treasury Select Committee. (Also known as the three ring circus which in the UK passes for serious debate...)

Conspiracy theories abounded early on about a leak of the testimony to be given and thus explaining the rise in Cable from overnight lows. This is not only incorrect but more to the point, naively misleading. In part the overnight release of another Brexit poll showing favourable leanings to the remain camp, but perhaps more to the point the absolute absence of activity, liquidity and flow are by far and away the real reasons for Cable trading somewhat stronger within its recent well defined range.

Cable remains well bid as the TSC nears its end, but so do we quickly approach well marked levels of resistance, also known as the point where fresh offers begin to mute the unsustainable strength seen thus far. In short, look for once again the 1.4680/1.4730 area to cap any undue further exuberance.

The rest of the G10 FX space remains as (if not more) subdued as yesterday and offers little by way of respite to the recent monotony we’ve been living with.

As always, helmets on and good luck out there.

– Edited by Clare MacCarthy


Ken Veksler is director of Accumen Management


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