First, with respect of the RBA, here too I believe they’ve done the correct and rational thing. Not so much the fact that rates were left untouched (as expected) but rather the obvious lack of "panic" that was so evident in the statement released alongside the decision on policy. The RBA is well aware of the state (or rather lack thereof) of inflation, but equally conscious of the two key facts evident within the economy: it is undergoing a long period of protracted transition in line with shifting global dynamics and the GDP data last week (while perhaps a little too outsized) shows an underlying tone of steady strength. The market’s conclusion that having cut last month, the RBA would now embark on a distinct easing path was wrong at the time and remains equally so now.
They were, as I noted then, reticent to have gone in the first place but had their hand forced. They are most certainly not keen to go again unless, as last time, they’re faced with no other choice. Australia and its economy is unique in that the memories of cash rates north of 15% remain ever present in the minds of the central bank and they are equally aware of just how quickly the economy has the capacity to go from zero to hero in almost a heartbeat. If you’re pointing to the housing and property markets being a concern and bubble like, jog on, because frankly that’s the attitude of the bank too.
So the currency took an obvious pop higher (as alluded to here yesterday), cleared out last minute Larry and his stops and has now run into sellers trying to short the cross into the 0.7430/50 area. Whether they’re successful in keeping a lid on it will firmly now depend on the USD leg.
As for Yellen, I frankly think she did exactly what was required and did so rather well. Readers of this piece will know I’ve been looking for only one (at best) rate move from the Fed this year and increasingly looking for that move to come in September or later (admittedly that nasty presidential election may get in the way). The market, however, seems to be tail chasing in that regard though and naturally blaming the Fed for its own loss of direction. In Jan/Feb it was all about how they’ll never raise again because of China and the world ending, which frankly Yellen herself overplayed in March. Since then it’s been about the walk back to the middle of the road and management of the journey there.
Now if you’re game is to blame the Fed and other central banks for everything that’s wrong with *"your" thesis and trading, well please do carry on. Frankly, I feel they’re now doing a good job of being true to their data dependency mandate and are equally feeling their way through an the unfamiliar paradigm with which they’re faced.
My point here is to always be aware of where and how the market is pricing future hikes but equally have your own rational and objective view.
Late Asia saw what was either a fat finger or algo gone wild in the Cable and the price action since has done little to allay concerns for the well being of GBP market makers today. It’s only going to get even messier as we head closer in to the June 23 vote and thus you’re either foolhardy or brave to get involved unless you absolutely have to.
It’s increasingly messy out there with regard the rest of the G10 FX space and save for a spec AUD long that I’ve had on the book and is now closed I see very little of any real temptation right now. Thus I’m happy (if not enamoured with the idea of) sitting on hands in the near term.
As always, helmets on and good luck out there.
– Edited by Clare MacCarthy
Ken Veksler is director of Accumen Management