RBA: Market response to February rate decision - Westpac

Analysts at Westpac, point out that as recently as a week and a half ago, the A$ was up circa 6.9% versus the US$ from levels prevailing at the December meeting and 2.5% on a TWI basis.

Key Quotes

“While the A$ has dropped since, we went in to today's meeting expecting the RBA to alter the reference to it being "within the range that it has been in over the past two years". While they didn't strengthen the language, the RBA shifted the focus onto the TWI noting that "on a trade-weighted basis, the Australian dollar remains within the range that it has been in over the past two years" and that "An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast".”

“We have consistently argued that above 0.80, the A$ was expensive on the basis of our fair value methodology.”

“Rates Perspective

• Perhaps of most significance was the concluding paragraph and the inclusion of the "gradual" theme. "Further progress in reducing unemployment and having inflation return to target is expected, although this progress is likely to be gradual." As our Economics colleagues argued if this is the meeting and statement to re-frame the policy discussion for 2018 - it certainly reads like happy to sit on sidelines a while longer.
• Given that the RBA appears very comfortable with its current stance of policy, there has been little change in market pricing from that established following last week’s CPI outcome. Basically the next “live” meeting is assumed to be August, with a full rate hike not expected before 2019. Perhaps the Statement of Monetary Policy on Friday will have more for marginal market pricing of the medium term profile.
• AU bonds had reacted to the US 10yr yield price action over the past 24 hours, which, in combination with this morning’s weaker retail sales data, had seen 3yr bond yields lower by 8bps and 10yr yields lower by 11.5bp ahead of the RBA announcement. The bond rally has subsequently continued by a further 1.5bp across the curve.
• The 3-10yr bond curve has bull flattened, and the AU-US 10yr spread widened, along with swap EFPs, where 3yr is almost 2bp wider on the day. All of those reactions would be expected in an outright rally, so we should not look for any real causality with the RBA outcome.”