AU rates: a conditional easing bias

RBA policy risk is supporting a steep curve. RBA is expected to the keep policy unchanged over coming months while the Bank assesses the run of data to gauge the traction of current policy settings.

There is an implied easing bias to policy at present, which is designed to keep mild downward pressure on the AUD. The Bank is reluctant to ease rates further from current levels. If the case for further policy support for growth does strengthen, it would be more likely to build from unwelcome currency strength over several months, anticipates Bank of America. 

The Bank has clearly stated further currency weakness is necessary to aid the rebalancing of growth in the economy.

The recent correlation between a steeper bond curve and wider AU US spread has weakened over the past month as global pressures have continued to impact the long-end. 

Supply factors appear to be contributing to this at the margin considering ongoing longer-dated bond issuance and a proposal to introduce a new 20y bond futures contract.