"Unexpected" Australian Rate Cut To Record Low Unleashes FX Havoc, Global "Risk Off"
By Tyler Durden
Three months ago, when Australia unexpectedly revealed that its recent “stellar” job numbers had in fact been cooked we asked, rhetorically, why the sudden admission it was all a lie? Simple: weakness in commodity prices “is far greater than people had been expecting,” the nation’s top economist said. Australia is now “swimming against the tide” because of uncertainties in the global economy, he added. Which we translated as follows: “we need more easing, and to do that, the economy has to go from strong to crap.” And with the Australian economy suddenly desperate for lower rates from the RBA, one can ignore the propaganda lies, and focus once again on the far uglier truth.
Overnight this was finally confirmed when in a surprise move, Australia’s central bank cut its benchmark interest rate for the first time in a year to a record low and left the door open for further easing to counter a wave of disinflation that’s swept over the developed world. The move sent the local currency tumbling and local stocks climbing.
Reserve Bank of Australia Governor Glenn Stevens and his board lowered the cash rate by 25 basis points to 1.75 percent Tuesday, a move predicted by just 12 of 27 economists surveyed by Bloomberg. The rest had seen no change. Data last week showed quarterly deflation in the consumer price index and the weakest annual pace on record for core inflation, which the RBA aims to keep between 2 percent and 3 percent on average.
“Inflation has been quite low for some time and recent data were unexpectedly low,” Stevens said in a statement. “These results, together with ongoing very subdued growth in labor costs and very low cost pressures elsewhere in the world, point to a lower outlook for inflation than previously forecast.”
As Bloomberg reminds us, Australia’s central bank acted after two regional neighbors stood pat last week – New Zealand and Japan. Illustrating the impact of central bank decisions on exchange rates, the Aussie has the weakest performance among the G-10 since last Wednesday, a day before the Bank of Japan and Reserve Bank of New Zealand meetings. The announcement sent the AUDUSD plunging.
“They’re saying that there’s no point in messing around, let’s get in and do this, cut the cash rate and get some of the speculative money out of the Australian dollar,” said Chris Weston, chief market strategist at IG Ltd. in Melbourne.
In some way’s Australia rate cut had been telegraphed earlier in the aftermath of last night’s latest disappointing Chinese Manufacturing PMI number, which as we reported contractde for the 14th straight month, and not only missed but dropped to 49.4 after a brief March bounceback from February lows.
Perhaps more importantly, the plunge in the AUD caused havoc across other key carry trades, and following a nearly 200 pip plunge in the AUDJPY, the Yen soared once more, this time surging to the highest against the dollar since August 2014, pushing the pair as lows at 105.600, …read more
Source: "Unexpected" Australian Rate Cut To Record Low Unleashes FX Havoc, Global "Risk Off"
