Six words to trigger slide
The currency, which has shed 14 per cent of its value since mid-April, lost half a cent following Mr Stevens' comments on Wednesday about the Reserve Bank's decision on interest rates.
The dollar slipped to a 34-month-low against its US counterpart, falling below US91¢. It was trading at US90.58¢ late on Wednesday.
The plunge showed how sensitive investors were to any remarks about the dollar. It also mirrored the global jitters infecting financial markets over past weeks following comments by another central banker, US Federal Reserve chairman Ben Bernanke, of a possible pull-back of its stimulus program.
"The degree of focus on the exact wording and the tone is reminiscent of the years where Greenspan was 'the oracle' on monetary policy and the markets would hang on every word he said and how he said it," Westpac's senior currency strategist Sean Callow said of Mr Stevens' comments, which were understood to have been a quip and not intended to be taken literally. Alan Greenspan was the chairman of the US Federal Reserve from 1987 to 2006.
Expanding on his prepared statement, "yesterday the board, at its monthly meeting, left the cash rate unchanged" to the Economic Society of Australia in Brisbane, Mr Stevens instead said: "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."
Commonwealth Bank chief economist Michael Blythe said while it was not known what the context of the "deliberations" was, "it is reasonable to assume they focused on the need for further interest rate stimulus".
Deutsche Bank currency strategist John Horner said Mr Stevens' remarks suggested the RBA's decision on Tuesday had been a close call and that a cut in August to take the cash rate down to 2.5 per cent was possible.
Late on Wednesday ANZ revised its interest rate forecast to factor in a 25-basis-points cut next month and another cut in November. Financial markets priced in a 59 per cent chance of further easing of monetary policy at the RBA's August meeting.
Currency strategists said the Reserve Bank had been trying to talk the dollar down over the past few years.
While the markets were not listening in the past, they were now, Rochford Capital senior consultant Richard Breen said.
Frequently Asked Questions about this Article…
Glenn Stevens' offhand phrase that the RBA "deliberated for a very long time" prompted traders to read a hint of imminent policy easing. Markets are highly sensitive to central-bank wording, so his comment — coming after the RBA left the cash rate unchanged — triggered a sell-off in the Australian dollar.
The article says the Australian dollar had lost about 14% of its value since mid‑April and slipped to a 34‑month low against the US dollar, trading below US91¢ (around US90.58¢) late on the Wednesday reported.
Stevens expanded on the RBA's prepared statement by telling the Economic Society of Australia: "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." That wording suggested the decision was a close call and implied possible future easing.
Yes — the article reports that ANZ revised its forecasts to include a 25‑basis‑point cut next month and another cut in November, and financial markets had priced in about a 59% chance of further easing at the RBA's August meeting. Deutsche Bank also said a cut to 2.5% in August was possible.
Central‑bank commentary can move currencies strongly because investors focus tightly on wording and tone. The article notes that markets were already jittery from talk of a US Fed stimulus pull‑back, and Westpac's strategist compared the intense scrutiny of Stevens' words to the Greenspan era when markets hung on every remark.
Commonwealth Bank chief economist Michael Blythe said it was reasonable to assume the RBA's deliberations focused on the need for further interest‑rate stimulus. Deutsche Bank's John Horner described the decision as a close call with a possible August cut. ANZ adjusted its forecasts to factor in upcoming cuts, and Westpac's Sean Callow highlighted how market focus on wording can move exchange rates.
According to currency strategists quoted in the article, the RBA has attempted to "talk the dollar down" over recent years. Rochford Capital's Richard Breen added that, while markets didn't always listen in the past, they were paying attention now.
Everyday investors should watch upcoming RBA statements and meeting outcomes, market pricing of interest‑rate probabilities (for example the 59% chance of easing noted in the article), and central‑bank commentary from other major banks like the US Fed — all of which can affect the Australian dollar and interest‑rate expectations.
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