RBA: Small shorts squeezed in rates market - Westpac

Australian 3yr bond futures prices were trading at the lows of the day ahead of the RBA Governor’s statement but moved 2 ticks higher on the release, notes Damien McColough, Research Analyst at Westpac.

Key Quotes

“With a hike having been a 0% chance that suggests that the market was looking for a more hawkish outlook, perhaps around the forward growth profile, but that was not forthcoming and small shorts were squeezed. Indeed, the commentary around the growth profile is indicative a reduced RBA forecast in the may SoMP and that will only reinforce the concept of the RBA on hold for an extended period and also consolidate the broader 3yr trading range, which we see as being contained within the 97.70 – 98.05 range for now.”

“With 3m BBSW having set another 0.05bp higher today, despite the March quarter-end being behind us, there was also keen interest in in what the RBA had to say about financial conditions. As it was, they acknowledged that there has “..been some tightening of conditions in US dollar short-term money markets, [and] … this has flowed through to higher short-term interest rates in a few other countries, including Australia.”

“At the same time they still caution that financial conditions remain expansionary. So the RBA is clearly not particularly concerned about the prospects of banks passing on any increased funding costs via independent rate hikes and would appear to be adopting a “wait and see” approach to what happens in these short-term funding markets.”

“There was nothing else in the statement to alter our expectations for the curve and cross market spreads. The former is long-end directional and the latter will continue to consolidate recent outperformance before resuming that path later in the year.”