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Interest Rate Commentary

Following the weak non-farm payrolls the FOMC is expected to leave fed funds rate target range unchanged this week. An update to the “dot plot” will be released along with the Statement of Economic Projections. As we have stated before there is a clear difference between the “dot plot” and market pricing. Aligning market expectations with forecasts in dot plot will be difficult but we expect a meeting of minds somewhere in the middle by the end of 2016. The RBA kept rates on hold last week following the 0.25% cut the month before. While this was expected the comments following the release caused a jump in the currency before retreating a few days later.

 

The domestic yield curve is flat and overall yields across the curve are low compared to long term averages. In November 2015 there was a progressive increase in yield from ~2.60% to a high of 2.99%. But since this time the flight to quality meant the 10-year yield gave back the changes in Q4 2015 and more recently the Australian Government 10-Year Bond Yield has continued to drop to record lows (new low of 2.06% as at 14 June 2016). The 3-year bond has followed a similar pattern and broke out of its yield range (1.90 – 2.10%) in November / December 2015 reaching a high of 2.18%. It has since collapsed to reach a low of 1.51%. On the 10th June 2016 the ASX 30 Day Interbank Cash Rate Futures June 2016 contract was trading at 98.29 indicating a 19% expectation of an interest rate decrease to 1.50% at the next RBA Board meeting (up from 7% last week).