Lowe Pushes Back Against Yields Rise

The Australian Dollar has been sold been sold across the European morning following comments from RBA governor Phillip Lowe who was participating in the AFR Business Summit. Lowe’s comments drew particular attention as traders were keen to see how the RBA head would address the recent rise in domestic yields, as well as those globally. Yields have been surging this year amidst rising inflation expectations as markets look ahead to an acceleration of the economic recovery in Q2 on the back of vaccination successes. With inflation expectations lifting, traders have begun to bring forward their RBA tightening expectations, helping lift yields further, putting pressure on lending rates and asset prices.

RBA Not Concerned By Rising Inflation

Commenting on the recent dynamic in yields, Lowe told the summit: “Over the past couple of weeks market pricing has implied an expectation of possible increases in the cash rate as early as late next year and then again in 2023. This is not an expectation that we share.”

Wage-Driven Inflation The Main Focus

Lowe went on to say that any pickup in inflation over coming months is likely to be transitory in nature and will not deter the bank from pursuing its main aim of stabilising the labour market and focusing on delivering sustainable wage-driven inflation. Lowe also reiterated the RBA’s shift in how it targets inflation with the bank now needing to see actual inflation in the 2%-3% zone instead of just forecast inflation, which, according to its modelling, would need to see wage growth more than double from the current 1.4% to 3%. With this in mind, Lowe still maintains that rates will be held at current levels until 2024 at the earliest.

RBA Steps Up Bond Purchases

Lowe’s comment’s come on the back of the RBA recently stepping up its bond purchase program as it continues to support its YCC target of 0.1%. The RBA recently doubled its purchase amount in a bid to keep yields from rising, despite the pickup in inflation expectations.

The governor’s comments saw the yield on the 3 year bond dipping back below the bank’s Yield Curve Control target of 0.1% for the first time since December with the Aussie turning lower also.

Technical Views

AUDUSD

The pull-back in AUDUSD from the .7992 level highs has seen price breaking down through the rising trend line from 2020 lows. Price is currently being held up at the .7656 level support and while above the .7563 support (last swing low in the uptrend) the bias remains in favour of a continuation higher. Below .7563 the .7413 level is the next support to note.

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