RBA: Market response to October rate decision - Westpac

Analysts at Westpac, note that AUD/USD dipped about 20 pips to just under 0.7800 in response to the RBA statement, though for no apparent fundamental reason.

Key Quotes

“The steady hand on the cash rate was of course 100% priced in and the changes to the statement's language such as a somewhat more upbeat outlook on non-mining investment should not have surprised, given the RBA had to account for the Q2 GDP released after the Sep meeting. The RBA made no substantive change to its language on AUD, noting that its appreciation since mid-year will weigh on inflation as well as the outlook for output and employment.”

“The dip in the Aussie on the statement might reflect the large overhang of long speculative positioning, with some accounts hoping for a more hawkish note. But this week's Australian data releases should be more important for AUD. If the US dollar continues to find yield support, AUD/USD could ease towards 0.7750/60. But China's week-long holiday should keep ranges tight.”

“Rates Perspective

• IB futures-implied RBA pricing as at 2:30pm was  a 64% chance of a 25bp hike by May, with a full hike factored-in by August 18 and it was the same 10 minutes after the outcome of the RBA Board meeting was known. So it is probably no surprise that there has also been little shift in pricing further along the term structure as a result of the wording contained in the Governor’s Statement.
• AU 3yr futures have exhibited a degree of inertia around the 97.80 level over the past fortnight. With the sentiment in the Governor’s Statement widely expected ahead of the outcome to be either neutral or slightly hawkish (albeit within the context of an RBA that does not expect to be raising rates for some time), it was no surprise that both bond futures contracts were trading slightly heavy ahead of the Statement’s release. However, given the degree of tightening bias already factored-in, it is of no surprise to us that the prior heaviness, has been taken back, with prices now unchanged, to slightly higher, on the day, with the 10yr futures outperforming.  
• We continue to expect good support on dips in the 3yr futures, supported by carry-style trades, but acknowledge that the front end is basically well-anchored and 3yr futures are likely to spend a lot of time around the current level (97.80). The longer end will trade heavier, in line with our view that US bond yields can rise further, however we would expect cross market outperformance on a slow grind higher in yield, led by the US. We would also expect the current steepening impulse (albeit within a narrow range) to slow when the 3-10yr futures spread trades 70bps. At that level we expect a pick-up in yield enhancement demand.”