Analysis: Australia's central bank mangles message on A$, rates

Thu Sep 5, 2013 10:30pm EDT
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By Wayne Cole

SYDNEY (Reuters) - The Australian central bank's attempts to talk down its currency have backfired as markets have pushed up both borrowing costs and the dollar on a view its easing cycle may be over.

The Reserve Bank of Australia (RBA) would desperately like to see the Australian dollar much lower to help the country cope as a decade-long mining boom crests. That is a major reason it chopped interest rates to a record low of 2.5 percent last month.

And it concluded its September policy meeting this week with another plea for the dollar to fall further to help "rebalance" the economy.

Missing from its statement, however, was an explicit acknowledgement that there was still scope to cut rates further if needed, given a benign inflation outlook.

The accent on the currency instead of rates led investors to suspect that the RBA had shifted toward a more neutral policy stance, and even perhaps that it was done easing altogether.

The result was almost certainly not what the central bank intended. The market rushed to price out any chance of rate cuts and now is even hinting at a future hike, which in turn has shoved the Aussie sharply higher.

"In attempting to talk down the Aussie, the bank has inadvertently strengthened it by allowing the market to reduce the forward interest-rate discount that had assumed further RBA rate cuts," explains Sean Keane of Triple T Consulting, which works for Credit Suisse.

The sea change was evident in overnight indexed swaps, which essentially map out where the market thinks the cash rate will be over time.   Continued...

A worker carries boxes next to an armoured vehicle parked in front of the Reserve Bank of Australia in central Sydney September 3, 2013. REUTERS/Daniel Munoz