More gains in the Australian dollar, a tug-of-war on bonds and an uncertain read-across to global rate bets rank among strategist reaction to the nation’s central bank unexpectedly raising interest rates.
(Bloomberg) — More gains in the Australian dollar, a tug-of-war on bonds and an uncertain read-across to global rate bets rank among strategist reaction to the nation’s central bank unexpectedly raising interest rates.
The Reserve Bank of Australia decision is likely to fuel even more bets on hikes by peers including the Federal Reserve, according to some market watchers, while others see little spillover. The Aussie jumped more than 1% while yields on rate-sensitive three-year bonds surged 22 basis points after the decision, which was only predicted by nine out of 30 economists.
Here’s what market watchers are saying about the decision:
Fed Impact
David Forrester, strategist at at Credit Agricole CIB:
“The RBA’s hike today is likely to ramp up the market’s hawkish expectations for the Fed this week, as RBA is one of the G10’s least hawkish central banks and has shown the inflation fight is not over.”
Nick Twidale, chief executive Asia Pacific at FP Markets in Sydney:
“It puts another piece in the rate hike puzzle for the Fed. This may push up the chance for a June hike”
Upsets Pivot Hopes
Viraj Patel, strategist at Vanda Research in London
An unexpected rate hike in Australia is “a big spanner in the works for markets that had the RBA as one of the first G10 central banks to pivot.”
“I think the messaging will be similar from every central bank this week. But it’s a game of expectations and markets are largely expecting this from the Fed, ECB & BOE. They weren’t expecting it from the RBA, which is why we’re getting the reaction we’re seeing.”
No Bellwether
Giulia Specchia, a macro strategist at UBS in Sydney:
“I wouldn’t think the RBA is a good bellwether for any other central bank, they have been following their own path since the beginning.”
“Markets probably thought the RBA needed some more time to assess the impact of rate hikes; but the RBA was obviously uncomfortable with the stickiness of service inflation”
Laura Fitzsimmons, executive director of macro rates and FX sales at JPMorgan in Sydney
“I think RBA are seen as pretty idiosyncratic and have been more choppy in their tone vs the Fed who have been on a much more consistent messaging path. So I do not think this will feed more hike pricing into May or June FOMC decisions.”
Aussie Bulls
Jason Wong, strategist at Bank of New Zealand:
“Today’s move is a small step, against market expectations, that closes the policy gap with the likes of NZ, US, Canada. It’ll help support the Aussie dollar over the near term – I think the RBA’s reticence in hiking rates has been a dampening influence on the AUD over recent months”
Eugenia Victorino, head of Asia strategy at Skandinaviska Enskilda Banken AB:
Recommends buying Australia’s dollar against the yen on diverging monetary policy. “The Fed will have to convince the market that it will really keep policy rates steady after this week. Otherwise, market pricing of Fed cuts will weigh on the dollar”
Conflicting Bond Pressures
Kenneth Crompton, a senior fixed income strategist at National Australia Bank Ltd.:
“The three-year yield has jumped nearly 25 basis points but that still leaves it well short of pre-SVB levels. Banking concerns have added downside risk to the outlook and although those aren’t a domestic factor, and are being dealt with, there is still exaggerated downside risks being priced into rates. So I think the market will struggle to price more than one more rate hike at a time without exceptionally strong data.”
Risk for Equities
Matthew Haupt, a fund manager at Wilson Asset Management:
“Biggest risk now is potential for policy error now we don’t know what RBA will do. A potential higher terminal rate is a risk and negative for equities. It’s becoming a credibility issue now these shocks to markets, and we need to add discount due to policy uncertainty”
–With assistance from Matthew Burgess and Georgina McKay.
(Updates with additional comments)
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