RBA to keep the cash rate on hold at 1.5% - TDS

Analysts at TD and consensus expect the RBA to keep the cash rate on hold at 1.5% at tomorrow’s meeting.

Key Quotes

“We expect the Bank to reaffirm a neutral monetary policy bias again and for the Bank to shy away from introducing any changes to the statement for what is the last meeting of the year.”

“Australian data outcomes have been mixed the past month - Full time jobs in Oct continued to drive gains in employment, NAB Business Conditions in Oct rose to a record high and the 4th estimate of 2017/18 capex increased, but soft retail sales and muted wages growth suggest no sense of urgency for the RBA to hike rates in the near term.”

“The RBA has clearly indicated that it has very little appetite to cut the cash rate for doing so would add to financial stability risks. Two months ago we highlighted attractive carry and roll from receiving front end of Aussie swaps compared to what was on offer vs USD, CAD and NZD. This is no longer the case. Carry and roll is higher in front dated USD, CAD and NZD swaps.”

“Nonetheless the view that the RBA is likely to remain on hold for sometime given weak wage growth, weak retail sales and slowing property prices imply that funds could continue to receive front end Aussie swaps given the low probability attributed to the RBA hiking in H1 2018.”

“Another driver supporting receiving front end Aussie swaps is as a spread to front end US. There is a risk that repatriation of offshore US corporate profits forms part of a US tax deal. In this instance, USD libor could move sharply higher and compress front end AU-US spreads.”

“The sharp narrowing in AU-US front end spreads has been a key driver in narrowing in the AU-US 10yr bond spread. The market expects the Fed to hike the cash rate on 14th Dec by 25bps, implying the cash rate differential moves to flat. The forwards markets are pricing in a negative cash rate differential in one year’s time, with AU-US 1y x 3m and the AU-US 1y x 1m OIS spread roughly –10bps. We suspect these spreads could remain in negative territory for some time. This implies the AU-US 10yr spread is unlikely to widen substantially in the near term. Ditto front end basis.”