Market response to November RBA rate decision - Westpac

With the RBA maintaining the same commentary on the exchange rate 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”, there is little fresh information in today’s policy decision from a pure FX perspective, according to analysts at Westpac.

Key Quotes

“the backdrop for today’s meeting has been pretty negative for the A$ with disappointingly soft retail sales, weak CPI and Monday’s ABS re-weighting suggesting weaker CPI to come. Thus the market probably went into today’s meeting focussed on the risks of a more dovish statement. There are more dovish elements including the point that household consumption is now described as a "continuing source of uncertainty".”

“However, there is little to suggest that RBA forecasts will change on Friday. Thus the A$ has popped slightly higher on the news. We tend to see the A$ as being capped closer to 0.7750 given our expectations of a stronger US$ into year-end; weaker iron ore prices on increased supply and softer data outcomes in Australia.”

“Rates Perspective

• With pricing for an RBA hike having fallen to around a 30% chance of a hike by August next year, which is in line with our own forecast for the RBA, we were not expecting this decision, or the nuances of the accompanying statement, to have much of an impact on market valuations. That has turned out to be the case, with the key benchmarks across the term structure all but unchanged, on next to no volume, in response.

• Perhaps a more in-depth discussion on inflation in Friday’s Statement on Monetary Policy will have a larger impact. If anything, however, we would interpret some of the new commentary around inflation, and household consumption, as being slightly dovish.

• So that suggests that carry-style trade will remain a feature of AU rates environment for some time to come. So “buy the dips” at the front end of the curve will be the pervasive trade, especially if led by non-domestic market outcomes, albeit not at current levels. This leads us to again fading UST-led bear steepeners at opportunity as well.”