RBA’s AUD expectations

RBA’s AUD expectations

Guy Debelle, an Assistant Governor at the Reserve Bank of Australia, recently discussed the prospect of a violent sell-off in markets. His use of the word “violent” is bold, given the RBA is known for its nuanced language. It was his discussion regarding investor reactions which we found most interesting.

Here is the excerpt from the speech that caught our attention (I have added the emphasis). You can read the full speech here.

There are a number of investors buying assets on the presumption of a level of liquidity which is not there. As I said earlier, this is not evident when positions are being put on, but will become readily apparent when investors attempt to exit their positions. If you are a buy-and-hold investor focussing on the return on your investment, then secondary market liquidity is not really an issue (though it might affect your mark-to-market valuations on the way through).

But there are probably a sizeable number of investors who are presuming they can exit their positions ahead of any sell-off. History tells us that this is generally not a successful strategy. The exits tend to get jammed unexpectedly and rapidly.

On top of that, my time in financial markets has taught me that one should never under-estimate the role of mechanical rules or mandates in driving market behaviour more than rational pricing.

So there is a fair chance that volatility will feed on itself. One should always be careful of looking for too much rationality in trying to understand market dynamics. Given the lack of rational arguments for the current state of affairs, trying to rationally explain how it will unwind is also going to be difficult.