For investors, a smile costs plenty
Reserve Bank governor Glenn Stevens was attempting a dry joke at lunchtime on Wednesday when he told an economists' conference in Brisbane that the central bank's board had deliberated for "a very long time" on Tuesday to come up with a decision to do nothing with its cash rate.
But when the Bloomberg business news service sent a flash to its clients that "Stevens says Board deliberated for a Very Long Time Y'Day", his off-the-cuff comment took on a life of its own.
The Australian dollar slumped by almost three-quarters of a US cent within minutes to fresh three-year lows of about US91¢, and fell further as word filtered out that Stevens had not intended to give everyone a steer about future cash rate decisions. Late in the afternoon it was trading at about US90.6¢, US1¢ down.
The comment by Stevens that moved the market followed a couple of other opening lines that got laughs.
"It's a great pleasure to be here in Brisbane again, thank you for the invitation, thanks for coming along: and as you may know, the Reserve Bank board in fact held its meeting here in Brisbane yesterday, at which we deliberated for a very long time and then elected to sit with the cash rate unchanged," he said.
He doesn't get a laugh in response on the audio file that the Reserve posted (as it does for all speeches) but Stevens did win some smiles, according to one person who was there, and his comment that the board had deliberated for "a very long time" was actually a hint: the board's window for deliberation when it meets on the first Tuesday of the month is not very flexible at all.
Board members sit down early in the morning and face an unbreakable 2.30pm deadline for a public announcement, be it a decision to hold the cash rate, as occurred on Tuesday, or a decision to change it.
The board, pushing up against the deadline if it debates too long, aims therefore to make the cash rate decision by lunchtime, and did so on Tuesday.
The market's feverish reaction does, however, betray something: overseas investors who are, in the main, invested without currency hedging in this market are still very nervous about where the dollar is headed.
They are sellers if they believe it is going down because a lower dollar reduces the translated value of their Australian assets.
When they saw the flash report of Stevens' comment, they also knew a cash rate rise was not up for discussion on Tuesday. The question was whether the Reserve should cut its cash rate or leave it for another month at 2.75 per cent, and the governor's comment was seized on as a hint it had been an unusually close call.
It's quite possible some board members were arguing for another cut. We don't know, because unlike the US Federal Reserve, the Reserve Bank does not disclose voting patterns.
I doubt, however, that anyone on the central bank's board was unhappy about the dollar's slide on Wednesday.
The statement the Reserve issued on Tuesday after it left the cash rate at 2.75 per cent made it clear it believed the dollar was still too high, despite its fall from almost $US1.06 on April 11.
It does not want a disorderly descent but wants the currency below US90¢, to boost the domestic economy and supplement the solo hand it has been playing with its cash rate as fiscal policy remains tight.
One irony is that Wednesday's fall in the value of the dollar was triggered by cash rate cut speculation but makes a rate cut less likely. The Reserve sees no looming inflation obstacle to cutting again but will be less inclined to cut if the currency keeps falling, particularly because it is seeing signs of activity.
The big question here is still how strongly the non-resources economy will build as the resources investment boom fades. In his prepared speech, Stevens noted that the crucial baton-pass is to the services sector, not manufacturing.
Australia's gross domestic product doubled in the 21 years to mid 2012 but only 3 percentage points of the increase came from manufacturing. Financial services, professional services and healthcare contributed 28 percentage points between them. The number of jobs in the economy has increased by 50 per cent over the same period and about two-thirds of them have come in household and business services.
Overseas, America's recovery must continue if the US Federal Reserve gradually unwinds its $US85 billion-a-month quantitative easing cash splash. Europe needs to avoid another derailment as QE's withdrawal tightens the global money supply and pushes government bond yields higher, and China's economy has to stabilise. Big asks - but Stevens says the data the Reserve has is still consistent with 7.5 per cent growth in China, the pace China's government is aiming at.