The Aussie dollar went for a ride yesterday to new two year highs while the ASX was crunched after the market jumped on a discussion of the “neutral” interest rate by the Reserve Bank was made public in the minutes of the July 4 board meeting.
But also playing a part was the collapse of Trumpcare, the proposals by the US President to change Obamacare, which knocked the US dollar to new 13 month lows with the euro above $US115, the highest level since May last year.
The dollar index hit its lowest level since last September, a move which has helped the Aussie dollar higher.
The Aussie bounced higher last Friday in the wake of weak US inflation data and retail sales figures, which were interpreted as supporting the apparent softening of the Fed’s rate policy stance by Fed chair, Janet Yellen in congressional testimony.
The dollar jumped to a new two year high of 78.38 on Saturday morning in the US, rose again Monday and then took off yesterday to 79.42 US cents in overnight trading, which was a new 26 month high.
Driving that move were these comments from the RBA’s July 4 minutes (http://www.rba.gov.au/monetary-policy/rba-board-minutes/2017/2017-07-04.html):
"Members discussed trends in the composition and cost of Australian banks’ funding. Deposits, which are generally a relatively low-cost form of funding, had increased as a share of funding over recent years, to around 60 per cent, while the share of debt funding, particularly at short maturities, had declined.
"The cost of both types of funding had declined further since late 2016. Members noted that, over the same period, banks’ lending rates had increased slightly, driven by increases in housing lending rates for investors and on interest-only loans. As a result, the implied spread between the estimated average outstanding lending and funding rates for banks was estimated to have increased slightly.”
The punters and urgers in the markets took that to mean ‘rate rise looms’ when it was nothing of the sort – merely the acknowledgement of a discussion of a topic that has been discussed before by the RBA board but not given as much prominence as they received in this month’s minutes.
The ASX fell below 5700 points after the release of the minutes and lost 1.2% or 68 points for the day, a slide that has wiped about $18 billion off the market’s value.
But the rate chat wasn’t the main cause of the sell off – it was the expected slide in big bank shares ahead of the announcement later today of the new capital buffers to ensure the banks are not took big to fail in a repeat of the GFC or something similar.
Those harp losses in the big banks ahead of the release of the new capital requirements weighed heaviest on the markets. Each of the big four has dropped by around 1.7%, dropping close to $7 billion in value. At the same time the minutes also revealed a significant change in the wording of the vital final paragraph which was more detailed than revealed in the post meeting statement from Governor Philip Lowe a fortnight ago.
Final paragraph of the July meeting’s minutes read (the additional words are in bold):
"Members regarded the improvement in the world economy over the preceding months as a welcome development. Nevertheless, they assessed that current economic conditions in Australia, and the outlook for growth and inflation, meant that developments in the labour and housing markets continued to warrant careful monitoring. Taking into account all the available information, the Board judged that holding the accommodative stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.”
Governor’s statement post the July 4 meeting:
“Taking account of the available information, the Board judged that holding the stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time."
Final paragraph of the June meeting’s minutes:
"The Board continued to judge that developments in the labour and housing markets warranted careful monitoring. Taking into account all the available information, including that year-ended growth in output was expected to have slowed in the March quarter, the Board judged that holding the accommodative stance of monetary policy unchanged at this meeting would be consistent with sustainable growth in the economy and achieving the inflation target over time.”
That went unnoticed yesterday because of the “neutral rate” discussion but it says that the bank is now very much aware of the improvement in offshore economies would soon start having a greater impact on local activity.
Deputy Governor Guy Debelle speaks on offshore influence on domestic monetary policy on Friday.
The extra words in the vital final paragraph of the July minutes (which gives us a summary of what the bank thinks about the economy and the main issues, and the course of action) means offshore events have now been elevated to the same level of importance of the bank’s two main headaches – the weakness in real wages against the gathering strength in the jobs market, and the question of the housing boom and whether the unhealthy lending, especially to investors, is under control, taking the heat out of high prices and the growth in debt.
