Market response to RBA rate decision - Westpac

Analysts at Westpac, suggest that from a FX Perspective, while that language was largely maintained today, it did evolve slightly today as the RBA noted the recent fall stating that "the Australian dollar has depreciated a little recently".

Key Quotes

“This is very much in line with our own modelling which suggests that the A$ is now well inside the top end of the 'fair value' band as the currency has indeed fallen against a rising US$. This tends to fit in with our view that, having dropped 3.5% from above 0.78 just two weeks ago, we should start to see the A$ finding some more support around the 0.75 level on the basis that it is no longer 'expensive' on our fair value models and the speed of decline has been pretty aggressive by historical standards.”

“Rates Perspective

• Today’s unchanged announcement was universally expected and caused little market reaction. While there was some hawkishness in the growth forecasts “growth to pick up, to average a bit above 3 per cent in 2018 and 2019”  this still emphasises the RBA will be on hold for a long time, so that is supporting front end which has recently found support at what has traditionally been very cheap levels relative to cash.
• With the RBA backdrop benign, the near term directional focus remains on UST outlook, and with 10 years hovering around the psychological 3% level the key event will likely be the upcoming US quarterly refunding announcement, which should see higher auction sizes across all maturities. While this sets up a bearish underpinning, of course the question remains how much is already in the price.
• Over the longer term, if a gradual UST-led sell off continues, we expect that AU bonds will continue to outperform. Noting that next week’s Australian Budget should emphasize the differing issuance outlooks.”