Australian bonds slump ahead of FOMC policy decision, ASX200 climbs

The Australian bonds slumped Wednesday ahead of the Federal Reserve’s first monetary policy meeting for 2017 scheduled to be held later in the day. Also, investors are now looking forward to the release of trade balance data next week, besides, the Reserve Bank of Australia’s first monetary policy of 2017, scheduled to be held on February 3 for further direction in the debt market.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, climbed 3 basis points to 2.75 percent, the yield on 15-year note rose 2 basis points to 3.20 percent and the yield on short-term 2-year moved higher by 1 basis point to 1.80 percent by 05:00 GMT.

The FOMC monetary policy statement will be published Wednesday, 1 February at 18:00 GMT. Following the move to raise rates at the December meeting (alongside maintained support from economic data) we see the January meeting as a moment of pause for the FOMC as they seek to re-evaluate the current landscape of the new administration.

Looking ahead to expected tightening over the course of 2017, markets will pay closer attention to the statement's underlying details (and accompanying economic forecasts) to see when the Fed is likely to move next. Given the relative lack of action from the FOMC in 2016, it will be difficult to see how they will not be more aggressive in 2017 (even if just a little).

Nevertheless, there will probably be some reservation by officials to wait and see what new fiscal initiatives are proposed before determining a more concrete economic outlook (consequently, guidance for rates).

Moreover, the Reserve Bank of Australia (RBA) is expected to hold its first monetary policy meeting of 2017 on February 7. It is widely expected to maintain its bank rate at a historic low of 1.50 percent amid global market uncertainties.

Evidence increasing that Australia is at a positive transition point for nominal growth, inflation and wages. Also, the unemployment rate has been unchanged for 9 consecutive months (trend basis) and the improvement in Q4 full-time employment will alleviate RBA concern.

If downside tail risks continue to subside and broader momentum improves as expected, RBA's next policy move will be 25 basis points hike in the first-quarter of 2018.

Moreover, forward-looking indicators of the labour market weakened somewhat in December, suggesting some headwinds in the first half of 2017. The average jobs hours remains range bound, rising slightly to 34.8 hours in December, from 34.7 hours in November.

Meawhile, the ASX 200 index traded 0.46 percent higher at 5,599.50 percent at 05:00GMT, while at 5:00GMT, the FxWirePro's Hourly AUD Strength Index remained neutral at 28.94 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex