JGBS: Modest Bull-Steepening As BOJ 2-Day Meeting Starts

The RBA is unanimously expected to hike rates 25bp to 4.6% today. In August, its tone was hawkish around upside inflation risks and this month RBA Governor Bullock told the House of Reps Economic Committee that they continue to be skewed to the upside and importantly they "appear to be materialising". The policy outlook is uncertain and so the tone of the statement and press conference will be key as will Q3 CPI on 28 October. Key AUD and local rates risks are outlined below in terms of the today's decision, framed within whether it is a hawkish or dovish +25bps move, along with key statement watch points. 

• For AUD/USD, if a hawkish hike is delivered we could see a bounce providing a reprieve to the longs. First resistance is toward 0.7040-0.7050 and then the 0.7080-0.7110 area is where we suspect we could see sellers fade a bounce. We suspect for the pair to break higher it would need a reversal in the fortunes of the USD which seems a big ask in the short-term at least. A dovish hike and the headwinds for the pair will increase and add further weight to a potential test of the 0.7000 support. A sustained move below here and we suspect we could see more AUD longs hit the exit button.
• In the rates space Since the early 2000s, across the three previous tightening cycles, the peak in the 3-year yield has generally been around the same level as the peak cash rate. The main exception was the 2009-10 cycle, when the 3-year yield peaked around 50bp above the eventual cash rate peak of 4.75%. With the current 3-year yield and expected cash rate peak both around 5.0%, a dovish hike could trigger a material rally in the ACGB short-end if it prompted the market to substantially unwind its current 3 x 25bp tightening expectation. However, it is worth noting that the 3-year yield has typically peaked around the time of the RBA's final hike, limiting the scope for a sustained rally until the market gains greater confidence that the tightening cycle is close to completion.
   
• For today's decision, focus will be on the vote, which may not be unanimous due to differences of opinion on potential growth/labour market strength and timing of policy moves as staff forecasts won’t be updated at this meeting. As the next meeting isn’t until 3 November and the data has generally been to the upside, the argument will be “why wait?”.
• If the RBA again discusses ongoing upside risks to inflation, then it will be clear that it is keeping its options open for further hikes at the November and/or December meetings. Officials have observed that the main risks stem from weak supply/productivity growth, excess demand especially due to domestic and global AI investment, ongoing disruption to global energy flows from the Middle East boosting fuel prices and rising inflation expectations.
• The statement and Bullock’s comments are likely to remain hawkish as the Board retains a tightening bias after hiking. Watch to see if these statements from August or something similar are retained - if “domestic inflation pressures could be higher than expected”, inflation “is not expected to return to around the midpoint of the target range until late 2027 and there are upside risks to this projection” and it will increase “the cash rate target further if upside risks materialise.”
• See more details in our full preview here at this link. 

Fig 1: Spot AUD/USD 

Source: Bloomberg Finance L.P./MNI 

 Fig 2: ACGB 3yr Yield & RBA Cash Rate 

Source: Bloomberg Finance L.P./MNI

The pair have started the Asian session under a little pressure as risk continues to trade on the backfoot. The market awaits the RBA today with AUD longs hoping for a hawkish hike to alleviate some of the mounting pressure.

• {AUDUSD Curncy} - 0.7014, -0.06%
• {NZDUSD Curncy} - 0.5664, -0.05%
• {AUDNZD Curncy} -  1.2383, -0.02%

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