AUSSIE BONDS: Yield Curve Looks Too Steep Vs. Mkt Exp For RBA Cash Rate
The Australian 3s/10s cash curve continues to flatten, with the level now the flattest since March. The recent curve flattening has occurred alongside a steady rise in market forward expectations for the RBA cash rate.
- While the RBA's decision to leave the cash rate unchanged this week was expected, Governor Bullock said that 2026's discussions are likely to be around whether to leave rates at 3.6% or increase them, as the Board is uncomfortable with where inflation currently is. This suggests that the RBA's stance is skewed to the upside (see MNI RBA Review).
- The spread between the 1-year forward 3-month swap (1Y3M) and the 3-month rate—often used as a proxy for policy expectations a year ahead—has widened by more than 150bps since April, underscoring the magnitude of the shift in rate expectations.
- A simple regression of the 3s/10s curve against the 1Y3M rate over the past three years suggests the current curve is roughly 20bps too steep relative to its fair value.
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CHINA: Central Bank Injects CNY286.3bn via OMO
Money market rates still remain elevated as the PBOC has another day of significant liquidity injection. The overnight money market rate spiked this morning to its highest level since July.
- The PBOC issued CNY403.8n of 7-day reverse repo at 1.4% during this morning's operations.
- Today's maturities CNY117.5bn.
- Net liquidity injects CNY286.3bn.
- The PBOC monitors and maintains liquidity in the interbank system through the issuance of reverse repo.
- The CFETS Pledged Repo Deposit Institutions 7 Day Weighted is at 1.43%, from prior close of 1.49%.
- The China overnight interbank repo rate is at 1.53%, from the prior close of 1.45%.
- The China 7-day interbank repo rate is at 1.54%, from the prior close of 1.50%.
JPY: USD/JPY Probing Recent Highs Near 154.50, 155.00 Next Upside Focus Point
USD/JPY is pressing towards 154.45/50, which has marked recent highs. There has been a variety of official comments this morning, although the only directly FX related one was the remark around weaker yen driving import costs higher. The rest are largely focused on upcoming fiscal support and broader policy goals (positive real wages etc). Broader USD sentiment is firmer, with all of the G10 down versus the USD at this stage (yen is slightly underperforming). US equity futures are ticking up. A clean break higher in USD/JPY is likely to see 155.00 targeted.
Fig 1: USD/JPY Probing Recent Highs
Source: Bloomberg Finance L.P./MNI
MNI: CHINA PBOC CONDUCTS CNY403.8 BLN VIA 7-DAY REVERSE REPO TUES
- CHINA PBOC CONDUCTS CNY403.8 BLN VIA 7-DAY REVERSE REPO TUES
