RBA: FX and rates market response to rate decision - Westpac

RBA commentary on the A$ was again left unchanged in the March meeting, notes the research team at Westpac.

Key Quotes

“Back in December last year, the RBA noted that “on a trade-weighted basis, the Australian dollar remains within the range that it has been in over the past two years. An appreciating exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast”.”

“The same language was delivered at the Feb meeting and again today suggesting the RBA remains fairly relaxed with the level of the A$ though it is worthy of note that the A$ TWI is approaching 18 month lows.”

“Not surprisingly, there was little reaction in FX markets to A$ guidance. However, we would expect to see some softening as markets digest what appears to be a tweak in the RBA’s GDP growth forecast over the next couple of years from an “average a bit above 3%” to “faster in 2018 than it did in 2017”.”

“Rates Perspective

• The AU rates market had been trading heavily all day, off a weaker UST lead overnight and both 3yr and 10yr bond futures remain at or near their lows post-RBA.
• That is, rates markets have largely ignored the RBA commentary, perhaps assessing the lower growth commentary as a trade-off versus the view that wages have troughed. Neither of those expectations is outside the framework underlying Westpac’s own forecast of an RBA on hold for the foreseeable future. Nor would they have sufficient weight to shift market policy pricing away from current expectations. So the market attention moves to tomorrow’s GDP release, the outcome of which is probably more important to medium term forecasts.”