christopher kent : financial conditions and the australian dollar recent developments address by mr christopher kent, assistant governor ( financial markets ) of the reserve bank of australia, to the xe breakfast briefing, melbourne, 15 february 2019. * * * i thank david jacobs for excellent assistance in preparing these remarks. introduction thanks to xe for the opportunity to be here in melbourne to speak to you. a lot has happened in financial markets globally and in australia since late last year. i thought it would be helpful to summarise the key developments, including revisions to the global economic outlook, concerns about downside risks and changes to market expectations for monetary policy paths. i'd also like to discuss their implications for the australian economy and the australian dollar. but first, a brief caveat is in order on the topic of exchange rates. it's often said by reserve bank staff that we are not in the business of forecasting exchange rates. but, just as importantly, we also need to be humble when explaining the past behaviour of exchange rates. in that regard, it is worth recognising that models of exchange rates provide only rough estimates of the more enduring relationships. the international backdrop after a lengthy period of relative stability, global financial markets have been more volatile over the past few months. the incoming data from around the end of 2018 was associated with a tightening in financial conditions : global equity prices declined ; corporate credit spreads widened ; issuance of corporate debt eased ; and volatility picked up across most markets ( graph 1 ). and in the space of only a couple of months, the market's expectations for monetary policies changed markedly and there was a notable downward shift in yield curves. graph 1 1 / 11 bis central bankers'speeches what prompted these changes? in part, market participants reassessed their expectations for global growth. this reflected a run of data that was a bit weaker than had earlier been expected, particularly for the industrial sectors and trade. however, this was not true of all of the incoming data. indeed, labour markets have remained in good health ; the us labour market data of late have been especially strong. moreover, labour market tightness is evident more broadly and wages growth is picking up in a range of advanced economies. forecasts for growth of global economic activity have been revised lower, but only marginally. in late january, the imf's forecasts for global growth were trimmed for 2019 and 2020, by 0. 2 and 0. 1 percentage points,

the renminbi, which collectively comprise nearly 40 per cent of the twi. the yen appreciation may have been driven by the tendency of japanese investors to bring some of their funds back home during ‘ risk - off ’ periods in global financial markets. graph 8 8 / 11 bis central bankers'speeches the decline in australian bond yields relative to other advanced economies is likely to have contributed somewhat to the modest depreciation of the australian dollar of late ( graph 8 ). however, over much of the past 18 months or so, higher commodity prices appear to have worked to limit the extent of australian dollar depreciation. 5 indeed, commodity prices have increased noticeably of late. this largely reflects disruptions to supply, particularly of iron ore. in short, there are a number of forces affecting the australian dollar, but they have been pulling in different directions. accordingly, the australian dollar remains within its relatively narrow range of the past few years. having noted the low volatility of the exchange rate over recent years, i need to briefly touch on the recent flash event in currency markets that no doubt caught the attention of many of you in this room. 6 on 3 january, in the span of a few minutes, a sharp appreciation in the yen against the us dollar quickly cascaded into the australian dollar, which depreciated by up to 7 per cent against the yen ( graph 9 ). at the same time, bid - ask spreads had widened significantly. however, trading conditions quickly returned to normal and currencies largely retracted their earlier moves. graph 9 9 / 11 bis central bankers'speeches it is difficult to draw firm conclusions on the causes of such events, but as we outlined in the recent statement on monetary policy, three factors are likely to have contributed. first, there was the liquidation of ‘ carry - trade ’ positions, notably from highly leveraged japanese retail investor accounts. these appear to have been automatically triggered following the initial appreciation of the yen. second, these liquidations occurred at a time when market liquidity was seasonally low, such that the foreign exchange market was more exposed to imbalances between buy and sell orders. recent flash events have tended to occur around this same time of day, in between the close of us markets and the start of asian trading. it was also early in the new year and a public holiday in japan. third, as in previous flash events, algorithmic trading strategies may have amplified the move, for example, by adding to demand to