RBA: Market response to March rate decision - Westpac

Analysts at Westpac explain that RBA’s March statement was broadly unchanged, but a subtle one word change in final paragraph – RBA inserted the word monetary. i.e. last month they held policy (in broadest sense) unchanged, this month Council of Financial Regulators (CFR) changed macro-prudential policies, but RBA did hold monetary policy unchanged.

Key Quotes

“Therefore also not surprising to see RBA devote a new paragraph to developments in mortgage market and particularly referencing interest-only loans.”

“FX Perspective

• As expected no change in guidance on FX. The RBA has stuck with “an appreciating exchange rate [could]/would complicate this [adjustment]” for the last 11 months now. It was unlikely that this would have been changed today.
• However, the backdrop for the A$ has softened in our view. The combination of Fed rate hikes, softer iron ore and signs of softening in the domestic economy warrant a weaker currency. We see the A$ as capped between 0.7650/0.77 near term and likely to test down to and through the 200 day moving average at 0.7550 in the sessions ahead.”

“Rates Perspective

Given the largely as expected outcome, it is no surprise that the bond market has not reacted to the release of the Governor’s statement. In our view, this is further confirmation that the RBA is a long way from shifting its cash target in either direction. OIS pricing already reflects that outlook.”

“So the main themes remain in place:

• The front end of the AU curve is anchored and hence carry-trades will continue to be popular for a number of months.
• Outright direction will be dominated moreso by global shifts in sentiment and momentum than by a revision to the domestic fundamental outlook.
• Tactically, trade the range. We are currently near the lower end of the yield range, so we would certainly be out of longs and looking for the price signal to establish tactical shorts. That signal will be provided by the UST market and whether or not 10yr yields can breach 2.31%.
• The 3-10yr curve is also likely to range-trade, but our bias is to have more risk on flatteners than steepeners at each end of the range.
• AU bonds should remain well-sought after on a cross market basis. They are high quality, high yield and as the RBA says “Inflation remains quite low”. So fade any widening impulses in the AU-US bond and forward swap spreads.”