Dec 5, 2017
RBA: Market response to December rate decision - Westpac
Analysts at Westpac, notes that the FX and rates market response to today's RBA rate decision was as per expectations.
- With the A$ recently dropping to 5 month lows versus the US$ and close to 1 year lows on a TWI basis, the RBA certainly could have expressed a slightly more relaxed stance towards the currency.
- While the warning that "an appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast" remained intact, this was pre-faced by comments that "the Australian dollar has appreciated since mid year" and that "the higher exchange rate is expected to contribute to continued subdued price pressures in the economy" in November.
- In December, the RBA prefaced the appreciation warning with the observation that the "Australian dollar remains within the range that it has been in over the past two years". It seems fair to argue that this might suggest a slightly more relaxed stance towards the currency on the part of the RBA.
- We have long argued that the A$ would finish the year close to 0.76, and that weakness would continue into next year. However, with commodity prices, including iron ore, looking like finishing the year on a high, we would not preclude a period of near term strength for the A$ towards 0.77. We stick with that view.”
- AU Rates had been trading heavily throughout the day, down 3 ticks across the curve from yesterday’s close, led by the domestic data, although there was very little anticipation of the RBA outcome producing a shift in valuations.
- That expectation was largely vindicated but, following the release there was little to reverse the bearish tone, especially with the RBA appearing more sanguine on the level of the currency. So as we write bond yields are higher by a further basis point across the term structure.
- There has been no shift in curve shape, and the AU-US 10yr spread has widened back to 20bps.
- We would assess the risk reward around tomorrow’s GDP release as being skewed toward bearish outcomes, so we expect the market to remain heavy for now.”