Article / 05 May 2015 at 11:53 GMT

How the RBA made a 25-basis-point political error

Director / Accumen Management
United Kingdom
  • The RBA loses all credibility
  • UK PMI doesn't move Cable 
  • Dollar is still in consolidation 

By Ken Veksler

The Reserve Bank of Australia has lost all respectability (if there was any left to lose) and has cut rates once again this morning to new all-time lows leaving the cash rate at a flat 2%. The price action that ensued around the announcement was entirely laughable as the bulk of the move in the currency had pre-emptively occurred since last Thursday wherein a series of articles were published in local Australian media telegraphing this change in monetary policy. 

So, in short, we saw a stop hunt either side of where we were trading into the print around 0.7840/50 and then proceeded to rally roughly another 50/60 points to the upside before now once again, finally settling down.

If Governor Glenn Stevens thought he was giving a master class in central bank communication, he’s sorely wrong. Rather, what he’s done is bow to political pressure and left himself without any dry powder whatsoever. 

The last bullet in the monetary policy chamber has now been fired and all eyes will be on the treasurer, Joe Hockey, as he is due to hand down the federal budget in a matter of weeks. 

Deficit reduction will remain a pipe dream for Joe, despite trying to sell the picture as a rosy one. He’ll tell everyday Australians they’re better off with rates the cheapest they've ever been, but likely fail to mention the unaffordable nature of what that cheap money is intended on securing.

While on the topic of the AUD, a quick position update for those of you playing along at home, I was short the EURAUD (average around 1.4315) as of last week as you’d be aware and while not having reached my exact target this morning, I've now closed it entirely as feel that price action will be somewhat mean reverting in the near term as the dust needs to settle.
And while we’re here, my Cable short (also from last week) into 1.5430 has also now been closed as I took half of it back on Friday afternoon into 1.5180 and the remainder just around here around the figure.  


Rates have dropped, but cost of living pressures are up for everyday Australians. Photo: iStock

The song remains the same

Moving on, little news from Asian markets, especially as Japan is still out for Golden Week celebrations and the Chinese were too busy giving back some of their astronomic stock market gains. Headlines out this morning about potential incentives for fresh Chinese equity investment did little to move markets though. More attention (foolishly) has been paid to IMF commentary about the cutting of Greece’s lifeline should reforms not be made etc. The lyrics remain annoyingly similar while the tune changes just enough to launch another pop classic onto our radio stations.

This morning saw UK construction PMI come in a tad softer while doing little to move the Cable from its pre-election perch. The day ahead sees us waiting for US and CAD trade balance data as well as US services PMI prints. Not sure either will be massively market moving as we have ADP tomorrow and of course the NFP on Friday to look forward to.

In the broader sense I feel the USD consolidation phase remains in play and while ranges have been somewhat widened now, all else remains equal. I also believe that a better NFP and strong revisions will see some last minute USD bears running ever so quickly for narrow exit doors, thus further exacerbating a situation which had no real basis for existence in the first place. In terms of my own positioning, I’m now back to flat and looking for fresh inspiration.

As always, helmets on and good luck out there today.

– Edited by Oliver Morrison

Ken Veksler is director of Accumen Management


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