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Australia 10-year bond yield falls to over 2-year low on RBA’s dovish Statement on Monetary Policy; markets now pricing a rate cut

Australian government bonds rallied across the curve during Asian trading session Friday on the Reserve Bank of Australia’s dovish Statement on Monetary Policy (SoMP), where it lowered its growth forecasts substantially and noted that probability of rate rise or cut more evenly balanced than previously.

A rhetoric shift by the Australian central bank to a more cautious stance boosted hopes of an interest rate cut, weighing on the bond yields. Also, markets focus was shifted back on the U.S.-China trade developments after U.S. President Donald Trump signalled that it was not likely the two leaders would meet before a March 1 deadline.

The yield on Australia’s benchmark 10-year note, which moves inversely to its price, fell about 6 basis points to 2.089 percent (lowest since October 2016), the yield on the long-term 30-year bond also dipped 6 basis points to 2.65 percent and the yield on short-term 2-year slumped 7 basis points to 1.71 percent by 04:20 GMT.

The RBA in its February policy statement cut lowered GDP forecasts to 3.0 percent for end-2019 and 2.7 percent for end-2020, down from previous forecast of 3.25 percent and 3.25 percent, respectively. Inflation forecasts were also lowered.

The central bank said that probability of rate hike or cut are more evenly balanced than previously and the board does not see strong case to move rates in the near term.

“We have had an on-hold view for 2019 and 2020 for some time. We are sticking with this view for now, but think the risks of a rate cut have grown. Much will depend on how the data evolves over the next few months. In particular, we will be watching for signs as to whether the recent soft patch of data is temporary or the start of a softer trend,” noted St. George Bank.

However, after the RBA Governor Lowe’s dovish speech on Wednesday, there was not too much new to anticipate from today’s RBA’s quarterly Statement on Monetary Policy.

The RBA Governor Lowe indicated the RBA no longer necessarily expects the next move in interest rates to be an increase, saying the risks to the cash rate are “more evenly balanced.” Lowe said “downside risks” in Australia “have increased”, although he still expects the Australian economy to grow “at a reasonable pace”. We have had an on-hold view for the cash rate for 2019 and 2020 for some time. We maintain this view, but think the risks of a rate cut have grown considerably.

Lowe indicated a major uncertainty in the domestic economy remains the consumer. Household income growth is important to the outlook for consumer spending. Falling house prices pose a further risk. Lowe said the adjustment in house prices was “manageable”, although he also said it was very hard to model house prices.

On Tuesday, the RBA kept the official cash rate unchanged at 1.5 percent.

In the U.S., weaker sentiment drove down U.S. bond yields. The U.S. 2 and 10-year yields both fell around 4 basis points to 2.49 percent and 2.66 percent, respectively.

Meanwhile, the S&P/ASX 200 index traded flat at 6,005.50 by 04:30 GMT, while at 04:00GMT, the FxWirePro's Hourly AUD Strength Index remained highly bearish at -132.21 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex

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