ACGBs Take Beating From Hawkish RBA Hike, Curve Flattens

Cross-asset impetus and the RBA provided the main driving forces of Tuesday's Asia-Pac session. Core FI came under light pressure in early trade, as USD/JPY renewed two-decade highs with BoJ Gov Kuroda beating the drum for continued powerful monetary easing, which weighed on Tsy futures (typically strongly inversely correlated with USD/JPY). The RBA then jumped into the driving seat, providing a hawkish surprise with a 50bp hike to the cash rate target, which was predicted by just three out of 29 economists in the Bloomberg survey (most were looking for a 25bp hike, some for a 40bp move). Market pricing based on meeting-dated OIS was also leaning towards a 25bp move.

• Cash ACGBs ground lower from the off, catching up with overnight moves in U.S. Tsys and following the broader trend in core FI, before the RBA decision inspired a fresh round of aggressive sales. Yields soared as the curve bear flattened, they last sit 5.8-16.8bp higher, with 3-year yield stabilising just shy of the 3.16% session high. Futures sank in reaction to the outsized cash rate target hike, YM trades -16.5 & XM -7.5. Bills run 19-37 ticks lower through the reds.
• Aforementioned fallout from yen sales saw T-Notes lose some altitude, with the RBA announcement capping subsequent recovery attempt. When this is being typed, TYU2 changes hands -0-03 at 117-26+, off post-RBA low of 117-22+. Eurodollar futures trade 0.25-2.0 ticks lower through the reds. The yield curve runs flatter in cash trade, driven by short-end weakness. Monthly trade balance & 3-Year debt supply will take focus in NY hours.
• JGB futures followed their core FI peers lower and last deal at 149.46, 24 pips south from previous settlement. Cash curve is tad steeper as 30s remain on the back foot after an auction for that tenor, even as the low price matched expectations (98.75). Dovish comments from Kuroda-san may have countered the impact of RBA matters. Local data failed to move the needle for JGBs, as earnings growth topped forecasts but the contraction in spending proved deeper than expected.