Market response to March RBA rate decision - Westpac

In view of the analysts at Westpac, little impact was expected from the RBA's interest rate decision for FX markets, and that proved to be pretty much on the mark as the RBA remained upbeat on global growth ("Conditions in the global economy have continued to improve over recent months") and cautiously upbeat on China ("growth is being supported by higher spending on infrastructure and property construction").

Key Quotes

“On the domestic economy, the RBA noted the improvement in the domestic economy ("Consumption growth was stronger towards the end of the year") and also noted the improvement in sentiment based measures ("Most measures of business and consumer confidence are at, or above, average").”

“With no change in the guidance on the currency ("An appreciating exchange rate would complicate this adjustment"), it's pretty clear that the current level of the A$ is not an issue for the RBA. The A$ is unchanged from levels prevailing ahead of the announcement.”

“In terms of near term direction, we remain of the view that the A$ is firmly capped by increased expectations of Fed tightening at the March meeting and some signs of softening in commodity prices as China targets slower growth. This has left gains above 0.7650 as limited, and we view the A$ as a sell on strength towards that area.”

“Rates Perspective

• Rates markets have been trading heavily over the past few days and both bond futures markets were trading near their price lows heading into the RBA outcome. That heaviness was more a function of global bond market price action ahead of the FOMC next week than a reflection of considerations around the RBA outcome, however in our view sentiment skewed risk rewards towards more bearish price action, contingent on the RBA rhetoric. 
• As it was, while the RBA did repeat that “interest rates are expected to increase further in the United States and there is no longer an expectation of additional monetary easing  in other major economies”, there was nothing in the commentary to re-price market expectations. The is still less than 50% chance of a policy shift in either direction over the next 12 months, although the further out one looks, the greater the chance of a hike than a rate cut.
• Both futures contracts remain around their 2:30pm levels (3’s 97.92/3; 10’s 97.14/15). In each contract, those levels represent good medium term support and while there was no reason to “buy the dip” on this announcement, the opposite also holds true.
• So that suggests that the current thematics underpinning AU rates market outcomes remain in place, including the chance of slightly higher yields ahead of the FOMC (at most 10bps at the long end), a steeper 3-10yr curve bias and the AU-US cross market spread behaving as you would expect. The 10yr bond spread should remain centered on the low 30’s for now.”