Monday, 9 April 2012

Markets React Joylessly to RBA's Words, Not Actions: UPDATE x 3

UPDATE:  3.30pm 10 April

A week and an hour after the RBA announced it’s decision to hold the official cash rate at 4.25%, financial markets continue to move as if the rate cut was delivered.  Or have they?

The market moves are now as follows from just before last week's RBA announcement:
  • The AUD is currently trading around 1.0305 – up from late last week, but still around 1.35 cents below the pre-RBA announcement. 

  •  The major price action has been in interest rate markets.  The 3 year bond yield has plummeted to 3.26%, some 24 basis points lower than before the RBA announcement, while the cash rate in 1 year has also fallen to 3.26%, some 25 basis points lower than before the RBA decision. 

These are big moves – there may be more to come.  Bond markets always rally in countries where the central bank keeps policy too tight for too long - Australia is no exception.


UPDATE:  12.30pm 5 April

It's time to take profit on half the trade.

The non-rate cut from the RBA on Tuesday didn't deceive the markets - they collectively know that the economy is bumbling along well below trend; that inflation is about as threatening as Barnaby Joyce in a maths competition; and the global economy is more inclined to weakness in the year ahead.

The AUD is currently 1.0270 - it still should weaken over the medium term, but it is around 1.7 cents below the pre-RBA no-cut level.

Interest rate markets keep rallying after the RBA shock - the 3 year bond yield has dropped to 3.39%, some 11bps lower than before the RBA announcement while the cash rate 1 year forward has fallen to around 3.38%, some 13bps lower than before the RBA announcement.  The market is increasingly convinced that the RBA will now have to do more cutting over the year ahead to realign its inflation target.  

As mentioned below, financial markets can reward and punish the best and worst of forecasts when looked at in their narrowest form.  It must have been painful for those getting the RBA call right on Tuesday - that there would be no easing - and positioning for a higher AUD and higher interest rates only to see the reverse happen.

UPDATE:  12 noon; 4 April

We now have the AUD free-falling to 1.0275; the 3 year bonds are still at 3.45% despite a bearish lead from the US - so still well in the money; and the cash rate 1 year forward is 3.44% - an extra couple of ticks in the money from the pre-RBA announcement of yesterday.

Interesting to see the market seriously question the actions from the RBA in terms of holding monetary policy too tight for too long and of course, now pricing in a more aggressive catch up that will inevitably follow in the months ahead.

Market are so very interesting

Just before the RBA announcement at 2.30pm today, the market had the chance of a 25 basis point rate cut at around 35%.  The Australian dollar was around 1.0440; the 3 year bond yield was 3.50% and one year into the future, the market had a cash rate of 3.51% priced in.

When the RBA left rates steady, one might expect the AUD to strengthen and for interest rates across the yield curve to rise given that there was roughly a one-third chance of a rate cut that clearly did not materialise.

Go forward a few hours, the AUD has fallen to 1.0370; the 3 year bond yield is lower at 3.45% and the market is now pricing in a 3.46% cash rate one year from now.

It’s almost as if a rate cut was delivered!

So pity the poor traders who got it "right" with no rate cut from the RBA… while the others, positioning for a cut are crying all the way tot he bank.

No wonder there some sour grapes coming from the joyless commentators who misread the markets and the RBA assessment of conditons that rates would be cut soon, if not today.

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