Australia: Markets sensitive to shifts in central bank commentary - BNPP

The Reserve Bank of Australia’s (RBA) July meeting minutes struck a markedly different tone to the statement as in stark contrast to the bland and largely unchanged policy statement, the minutes were more upbeat with, finally, some acknowledgement of the improvement in the labour market and also the outlook for global growth, explains Altaz Dagha, Research Analyst at BNP Paribas.

Key Quotes

“Commentary on where the neutral rate now lies has increased speculation that the RBA is lining up the market for a tightening cycle.’

“We disagree that this was meant to be an implicit tightening signal but certainly markets are currently sensitive to any shifts in central bank commentary. While activity data have picked up and survey data point to a rebound in Q2 GDP, growth remains well below trend, core inflation below target and unemployment rate above the RBA’s NAIRU estimate. A tightening in financial conditions from the 7% appreciation in the AUD’s trade-weighted index and hikes in bank mortgage rates is already under way and while a cooling down in the housing market would be welcomed, the RBA is unlikely to encourage further repricing.”

‘Not yet time to fade the cross-market move. Unwinds and stops in cross-market positions have been prominent in the front end (indeed we also hit our revised stop level in AU-US 1y1y). While the back end of the curve has also repriced, it has yet to break out of its previous range. Clearly, the risk is for a further leg higher in yields. That said, there is plenty of opportunity in the coming week for a reversal, with the RBA’s Guy Debelle (21 July) and Governor Philip Lowe (26 July) both speaking and Q2 CPI data (26 July). We expect that Lowe will not encourage the current sentiment and while not likely to be outright dovish, will focus on the data dependency of the tightening cycle. As such, we will look for an opportunity to fade the move next week once positioning is cleaner.”