Westpac: Will The RBA Shift Market Pricing?

Westpac note that "this is shaping up to be one of the more important weeks of the year for the Australian bond market. The RBA policy decision is set to dominate both near-term price action and long-term valuations. With the TFF having expired, and YCC not expected to be extended, the main focus will be on the QE program. The market will be keen to not only get confirmation of what a more flexible asset purchase program will look like, but will also be heavily influenced by the tone of the forward guidance articulated by Dr Lowe. So where does that place risk rewards around the meeting? Our call that the RBA will maintain a A$5bn a week program, is really an endorsement of the status quo, which should have limited impact, especially considering how much the curve has flattened recently. Even so, if anything, it would be slightly bullish and should extend the flattening trend marginally. On the other hand, if the market perceives a significant shift in the RBA's confidence around the medium-term economic outlook, beyond what is already priced-in, then that skews price action toward more bearish outcomes. A combination of both will see the belly of the curve underperform. We also expect that the confirmation of an extended QE will have important positive impacts from a flow perspective (more buying by RBA than AOFM issuance each week) and also a stock position, given how much of the ACGBs on issue the RBA is set to own. It is the latter that the RBA regards as the most important for the success of the policy. With that in mind, and given our medium term view that the U.S. cash rate will eventually rise above the RBA target, the conditions for further AU bond outperformance remain in place."