This week was all about the Federal Reserve of the United States meeting and economic projections, but one other event deserves to be mentioned. Last Monday, the Reserve Bank of Australia (RBA) published its monetary policy meeting minutes.
Typically, this is a non-event; even the economic calendars mark it as third-tier data (i.e., data that is not usually moving the market). Indeed, it has not moved the Australian dollar (AUD), but that is only because the Fed was due in two days.
RBA Crushing Bond Short-Sellers
Unlike the European Central Bank (ECB), the RBA went full ballistic on a yield curve control campaign. At the start of the new year, it strengthened its forward guidance, calling for a lower cash rate for an extended period of time. It also increased its asset-purchasing pace.
Yet, short-sellers wanted a yield higher than the 0.1% targeted by the RBA. To achieve that yield, short-sellers must borrow the bonds and short them, so that the yield is rising and the price falls.
What short-sellers did not expect was a brilliant move by the RBA – unfair, but brilliant. It simply asked the Treasury not to lend the 3-year bonds to the market anymore (so they cannot be borrowed and shorted). By doing so, the RBA remained the only available lender of such bonds, and it increased the cost of borrowing to such extent that it crushed short-sellers.
The moral here is that a central bank has enough power and ammunition to fight until it gets what it wants. Yields do move, but they tend to move only in the direction the central bank lets them to go. If we use a similar parallel to the move higher in the U.S. yields, it means that the Fed is willing to let them rise, not that the market is forcing the Fed’s hand. On the other hand, the market is much smaller in Australia, so maybe the RBA had the advantage of controlling a smaller market.
All in all, the move left the AUD pairs unchanged. Yet, it signals the strong desire and willingness of the RBA to stick to the yield curve control measures, and that should hurt the AUD in the medium to long term.
Fighting a central bank is expensive, and the terms are not always fair. Then again, this is the beauty of investing – right?