RBA: Market response to today's rate decision - Westpac

Analysts at Westpac, explains that they went into today's policy meeting expecting the RBA to again adopt the same language on the A$ as last month i.e. that "an appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast".

Key Quotes

“While the statement itself did sound slightly more upbeat on the economy highlighting "some pick-up in non-mining business investment" and "forward-looking indicators point to solid growth in employment", the overall tone from an FX perspective is largely unchanged.”

“Thus, we stick to our ongoing view that the A$ is well supported on the downside towards 0.7900/20 based on strong commodity prices, an improving global economic outlook and stronger growth in China. However, above 0.8050, we see the A$ as being capped by the market arguably 'underpricing' the Fed, rising geopolitical/ North Korean risks and our fair value models which would have the A$ expensive.”

“Rates Perspective

• Our expectation ahead of the Governor’s Statement was that there would be very little in it to move the AU rates market. If anything, however, we believed that the risk rewards were skewed toward bearish outcomes. That is, the market would largely ignore neutral or even slightly dovish commentary but would respond bearishly to anything that could be perceived as hawkish. The vulnerability of the market to bearish news was emphasised by the response to this morning’s Current Account Balance and Net Imports release, which suggests upside risks to tomorrow’s Q2 GDP release. The market has responded by pushing yields across the curve higher by 5-6bps on the day prior to the release. As it turned out it the statement was met with short covering, despite some signs of optimism around business investment, wages growth and housing.
• Even so, there is little reason to get particularly bullish ahead of tomorrow’s data and so we expect AU bonds to continue to trade heavily. We expect the curve to remain relatively stable around the 65bp level and will continue to focus on cross market relativities as the most interesting aspect of the A$ rates environment. Today’s moves have again pushed the benchmark AU-US 10yr bond spread above 50bps, to 52bp. The near term evolution in the spread will depend as much on US outcomes as AU fundamentals. That is, should UST yields lose a bit of their “safe haven” bid over coming days, we would expect the spread to again push below 50bps.”