RBA Preview - March 2021: Stabilising After Test Of Resolve

• The RBA is set to leave its monetary policy settings unchanged at its March meeting, although recent financial market swings have boosted interest in the event, after it was initially seen as a placeholder.
• We had been pointing to the difficulties that an outperforming economy may pose to the RBA's 3-Year yield target moving forwards, but hadn't been expecting such a dramatic test of the Bank's resolve at this time, with the impact of onshore economic outperformance bolstered by the global reflation/reopening narrative and last week's global core bond market volatility, which extended the cheapening/steepening pressure on ACGBs. Still, the space has recovered from last week's extremes, aided by the stabilisation witnessed in the U.S. Treasury market at the tail end of last week and upsized, but scheduled, ACGB purchases from the RBA on Monday of this week. Relative ACGB movements vs. global counterparts would have been of concern for the RBA. However, the Australian-U.S.10-Year yield spread has moved back from multi-month wides. The backend of last week also saw the AUD move back from multi-year highs in trade weighted terms, but the RBA will be particularly cognisant of the potential for a resumption of the upward push in AUD owing to any extension in the recent moves of relative yield spreads.
• With its options relatively limited, especially in the medium term, we suggest that the Bank will deploy more forceful guidance around its ACGB purchase rhetoric given the recent gyrations in markets, although it will be pleased that the yield on ACGB April '24 is back at 0.115%, well within its tolerance band. While this is by no means a certainty it would allow the Bank to follow the path of least regret.

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RBA Preview - Mar 2021.pdf