Pricing Surrounding RBA Tightening Back From Hawkish Extremes

Note that the dovish repricing observed in the IR strip over the last week or so has been relatively fierce, with contracts through the reds trading somewhere in the region of 60bp off their respective cycle lows.

• The move has garnered most of its traction since Tuesday, when RBA Governor Lowe’s pushback against the idea of a 75bp rate hike at the Bank’s July meeting and his general level of scepticism re: the level of tightening priced into the STIR space provided a bid. Since then, Westpac’s Bill Evans pointed to the RBA reaching a terminal rate of 2.35% in February (which would represent a much shallower than hiking cycle than the market currently prices), providing further support. A slight moderation in U.S. Federal Reserve tightening expectations through the current calendar year will also be helping the general direction of travel.
• Note that the IB strip now looks for ~45bp of tightening at the RBA’s July meeting (per BBG WIRP), down from the ~65bp observed last week. Further out, the IB strip now looks for a cash rate of ~3.30% come the end of the Bank’s December meeting, down from the cycle high of ~3.95%. Note that this still represents ~250bp of tightening during the remaining 6 meetings of the calendar year (a little over 40bp of tightening at each meeting if averaged).
• IR strip implied interest rates currently peak in the Jun ’23 contract (at ~4.20%) with implied rates gradually easing beyond there e.g. the Jun’24 contract currently sees an implied rate of 4.00%.