FINANCIAL MARKET UPDATE Debt Markets Sell Off Despite RBA Silence RBA leaves cash rate unchanged but local debt market sells off anyway Implied yields on 2006 bill futures strip up by between 6 and 20 basis points since their most recent lows late last month Most parts of the yield curve now normal once again Australian dollar higher against faltering US dollar, but Still shaky against other major currencies US debt market in holding pattern ahead of Friday night s payrolls The RBA surprised nobody by leaving the cash rate unchanged this morning, after its Board meeting yesterday. However, the sell-off on the bank bill futures strip that had started with last Friday s upbeat retail turnover report is gathering momentum quickly. Implied Yields on 90-Day Bank Bill Futures and Cash - 2006 5.75 5.7 2006 strip: Jun: 5.67 Sep: 5.74 Dec: 5.77 100 minus price of most actively traded contract Per Cent Per Annum 5.65 5.6 5.55 cash 5.5 5.45 Jan Feb Mar Apr Page 1 of 6
It should be noted that the bank bill futures market is paid to jump at shadows - just in case something really is lurking in them. The implied yield on the most actively traded contract has hit its current level (25 basis points over cash) more than once since the RBA last raised the cash rate more than a year ago, but as it turned out the RBA did not validate the futures market s sell-offs. Per Cent Per Annum 6.1 6 5.9 5.8 5.7 5.6 5.5 5.4 5.3 5.2 5.1 5 4.9 4.8 4.7 4.6 4.5 4.4 4.3 4.2 Impied Yields on Bank Bill Futures Contracts 100 minus price of most actively traded contract... (2) less than 5 months later, the RBA raised the cash rate... twice!!!!!! (1) implied yields dipped as much as 52 basis points below cash in the middle of 2003, but... 4.1 Jan 03 Jul 04 Jul 05 Jul 06 Apr 06 So what is the chance of the RBA following the futures market s lead this time around by raising the cash rate in the next few months? Prior to the next RBA Board meeting, the central bank will have pored over the March quarter CPI (to be published the day after ANZAC Day), while the June quarter inflation report will be available a week or so before the August Board meeting. You would have to say the risk of at least one of those key data releases showing that headline inflation has breached the top of the RBA s 2-3 per cent target is quite high as long as the Australian dollar oil price remains around $90 a barrel, so there is probably something in the futures market s thoughts this time. And that local currency oil price is where it is not only because the US dollar price of WTI crude is closer to $70 than $, but also because the Australian dollar is closer to 70 cents than cents. The local currency recovered overnight against a faltering US dollar, but remains shaky against other major currencies, as narrowing actual and prospective interest rate differentials more than offset still near record high commodity prices. If not for the latter, the Australian dollar would be closer to cents than 70 cents. Page 2 of 6
Australian Dollar WTI Spot Oil Price - 2005,2006 Price $A/barrel 94 92 90 88 86 84 82 78 76 74 72 70 68 66 64 62 58 56 54 52 06J F M A M J J A S O N D 06J F M A Index - May 1970 = 100 85 75 70 65 Australian Dollar Trade-Weighted Index monthly averages 65 64.5 64 63.5 63 62.5 62 61.5 61.5 Daily, Nov 05 to Apr 06 59.5 Nov Dec Jan Feb Mar Apr 55 50 45 Jan 84 86 88 90 92 94 96 98 00 02 04 Mar 06 Page 3 of 6
Australian dollar against yen and euro - 2005,2006 yen per $A euro per $A 91 90 0.645 0.64 89 yen 0.635 88 0.63 87 0.625 86 0.62 85 0.615 84 0.61 83 0.5 82 81 0.6 0.595 79 euro 0.59 78 0.585 77 0.58 76 0.575 05J F M A M J J A S O N D 06J F M A Index - January 1984 = 100 RBA Index of SDR (a) Commodity Prices and $A$US Exchange Rate 130 125 120 115 110 105 100 95 90 85 75 70 65 55 note: SDR - IMF special drawing right, multi-lateral currency measure commodities coal and iron ore contract price increases 50 Jan 84 86 88 90 92 94 96 98 00 02 04 Mar 06 XR Page 4 of 6
1 155 150 145 140 135 130 125 120 115 110 105 100 Australia:US 10-Year Bond Ratio and Exchange Rate ratio $US per $A ratio of 10-year Commonwealth bond yields divided by 10-year US Government bond yields, multiplied by 100. 95 Jan 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 Mar 06 XR ratio 0.84 0.82 0.8 0.78 0.76 0.74 0.72 0.7 0.68 0.66 0.64 0.62 0.6 0.58 0.56 0.54 0.52 0.5 0.48 Australia:US Cash Rate Differential and Exchange Rate - 2005,2006 Differential (basis points) $US per $A 325 0.8 300 exchange rate is 5-day moving average 0.79 275 250 225 200 175 150 125 100 75 differential XR 0.78 0.77 0.76 0.75 0.74 0.73 0.72 0.71 50 05J F M A M J J A S O N D 06J F M A 0.7 Page 5 of 6
Bill futures and oil price are sourced from Reuters; exchange rates from RBA HBOS Australia Economics Alan Langford (08) 9449 6354 Josh Rubin (08) 9449 6891 5 April 2006 No person should rely on the contents of this publication without first obtaining independent advice from a qualified professional person. Except for any statutory liability which cannot be excluded, HBOS Australia Pty. Ltd, its employees and directors will not accept any responsibility for any errors and are not liable for any loss, damage, cost or expense incurred or suffered as a result of relying on any opinion, representations, advice, recommendations, statement or information contained in this publication whether by reason of any negligence, act, omission, default or lack of care and whether or not such loss, damage, cost or expense was reasonably foreseeable. Page 6 of 6