No joke: Stevens rocks market

The dollar reacts to RBA chief Glenn Stevens' speech.
The dollar reacts to RBA chief Glenn Stevens' speech.
The dollar reacts to RBA chief Glenn Stevens' speech.

The dollar reacts to RBA chief Glenn Stevens' speech.

Reserve Bank governor Glenn Stevens was making a dry joke at lunchtime when he told an economists’ conference in Brisbane that the central bank’s board had deliberated for a very long time yesterday to come up with a decision to do nothing.

But when Bloomberg sent a flash to its clients that ‘‘Stevens says Board deliberated for a Very Long Time Y’Day’’ what was intended to be a humorous aside took on a life of its own.

The dollar slumped by almost three-quarters of a US cent within minutes to fresh 34-month lows below 91 US cents, and stayed there even as word filtered out that Stevens had not dropped a broad hint about monetary policy.

In truth, his comment that the board deliberated for a very long time should in itself have been a clue, and so should the fact that it came before he launched into his carefully written speech about ‘‘economic conditions and prospects’’.

The board’s window for deliberation on the first Tuesday of the month when it meets to consider its cash rate is actually not very flexible.

Board members sit down early in the morning, and they face an unbreakable 2.30pm deadline for a public  announcement, be it of a decision to hold the cash rate as occurred on Tuesday, or a decision to change it.

The board is pushing up against the deadline if it debates for too long. It invariably makes its decision by lunchtime, and is considered to have done so as usual on Tuesday.

The market’s feverish reaction does however betray something: overseas investors who are in the main invested in this market unhedged are still very nervous about where the $A is headed.

They are sellers if they believe the $A is headed lower because a lower $A reduces the value of their Australian assets measured in their home currencies, and they know that a rate rise is not up for discussion at the moment.

The only question to be answered on Tuesday was whether the Reserve would cut its cash rate or leave it at 2.75 per cent, and the abridged report of Stevens comment was taken as a hint that it was a very close call.

I doubt however that the Reserve is overly concerned about the dollar’s lunchtime adventure.

Its statement on Tuesday after it left the cash rate at 2.75 per cent made it very clear that it thinks the $A is still unhelpfully high, despite its fall from almost $US1.06 on April 11.

It would obviously prefer further declines to more orderly than Wednesday’s sudden dip was, but it won’t be unhappy to see a lower $A that provides further assistance to the domestic economy, taking some of the pressure for further cuts in a cash rate that is already at record lows.

This story No joke: Stevens rocks market first appeared on The Sydney Morning Herald.