Australia’s central bank minutes were far from the usual yawner, reversing perceptions of two weeks ago that Governor Philip Lowe was eschewing the hawkish turn many of his global peers had taken in June.

Coming in the midst of a broad U.S. dollar selloff -- spurred by the collapse of Trumpcare legislation -- the Reserve Bank of Australia’s minutes helped drive the Aussie and short-term yields to their highest since 2015. Traders were energized by the RBA’s discussion of a new neutral rate that they estimate would be 3.5 percent -- compared with the current cash rate of 1.5 percent -- and policy makers’ confidence that economic growth will rebound.

The following charts detail the moves and what drove them.

The Aussie was up 3 percent for the month by late Thursday in Sydney, the best performance outside Norway across G-10 currencies. Three-year yields, among the most sensitive to monetary policy moves, also soared and are heading for their steepest two-month advance since 2012. Thursday’s solid jobs report allowed the currency and the yields to hold near their highs.

Those moves came as swaps traders brought forward their expectations for when the RBA will raise interest rates and end an easing cycle that began in 2011 and involved 12 cuts that shaved 3.25 percentage points off the borrowing benchmark. Overnight indexed swaps indicate about even odds for an increase in February 2018 and they now show traders are certain of at least one hike within a year.

One reiteration in the minutes that got little attention was the comment that “an appreciating exchange rate would complicate” the economy’s transition after the end of the mining boom. The Aussie’s average value against a basket of other currencies, known as the trade-weighted index, has climbed about 6 percent since May, the sort of surge that may mitigate against the need for any tightening from the RBA.

Paul Bloxham, who previously worked at the central bank and is now HSBC Holdings Plc’s chief economist for Australia, estimates a 5 percent increase in the TWI has the same economic impact as a quarter-point hike in the cash rate.

Source:
courtesy of BLOOMBERG

by Garfield Clinton Reynolds

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