Tags: Australia | aussie | Fed | rates

RBA's Stevens Says Market Disruption Likely on Fed Rate Rise

Friday, 11 July 2014 01:51 PM

Reserve Bank of Australia Governor Glenn Stevens said he sees the “likelihood of some disruption in markets” when the U.S. Federal Reserve raises interest rates.

Stevens, in an interview published on The Australian newspaper’s website today, also said “it’s been a little early actually for people to be contemplating early rises in rates.”

“The likelihood of some disruption in markets is probably pretty high because it always is when the Fed eventually changes course,” Stevens told the newspaper. “That will be the case even though they will be very careful and measured and signal and so on, as they’re doing.”

The Australian dollar, which traded as high as about $1.11 and as low as 77 U.S. cents in the past five years, has remained above 90 cents since March even as the price of some of the nation’s key commodity exports declined. The elevated currency has impeded the RBA’s efforts to stimulate non-mining areas of the economy with record-low interest rates.

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Stevens said it is difficult to see how most standard metrics would “have the Aussie dollar quite this high.”

‘Maybe Underestimating’

“That’s why we’ve said that our sense is that some of the investors are maybe underestimating the probability of a material decline at some point, but I can’t say when that might be,” Stevens said. He said that by all accounts, the Fed starting to head in the direction of normalization will “be seriously in prospect” in a year from now.

The RBA kept its benchmark rate at 2.5 percent for an 11th month on July 1 and flagged a period of steady borrowing costs. Traders are pricing 15 basis points of cuts over the next 12 months, according to an index of swaps from Credit Suisse Group AG in Sydney.

The minutes of the policy-making U.S. Federal Open Market Committee’s June meeting offered no new clues on the timing of an interest-rate increase, with officials saying policy depends most “on the evolution of the economic outlook.” The federal funds rate, which represents the cost of overnight money in the interbank market, has been held near zero since December 2008.

The Australian dollar has gained about 7 percent since the RBA moved to a neutral bias in February this year. It traded at 93.87 U.S. cents at 5 p.m. yesterday in Sydney.

Stevens, who expressed a preference for a weaker currency in late 2013, resumed such commentary last week.

“Most measurements would say it is overvalued, and not just by a few cents,” he said in a July 3 speech in Hobart.

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Reserve Bank of Australia Governor Glenn Stevens said he sees the "likelihood of some disruption in markets" when the U.S. Federal Reserve raises interest rates.
Australia, aussie, Fed, rates
Friday, 11 July 2014 01:51 PM
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