As part of the RBA’s ultra-easy settings, it has provided an explicit 0.1% target for the three-year bond yield until at least 2024. Last week, the three-year bond yield traded as high as 0.14%, forcing the RBA to step in to buy $7 billion of bonds. In a follow up effort today, the RBA bought another $4 billion worth of bonds - double its usual size.
While the rise in global yields is a response to continued good news on the economic recovery, the speed of the rise is testing central banks determination to keep front end rates pinned at low levels. A measure designed to foster the continuation of the economic recovery.
As such, the RBA is likely reiterate tomorrow its commitment to the three-year bond yield target of 0.1% and remind the market that it is able to increase the size of its QE program if required.
The language around the AUD may also intensify from this in the February statement “The exchange rate has appreciated and is in the upper end of the range of recent years” to a more explicit warning that a continued rise in the AUD would be an unwelcome headwind to the recovery, a scenario that fits the technical picture of the AUD/USD as outlined below.
In our last update on the AUD/USD here we wrote “This short-term upside rejection has reinforced the importance of resistance at .7810/20 and the need for a break/close above it to re-ignite the uptrend, towards .8000c.”
After briefly reaching the upside target at .8000c last week, the subsequent sharp rejection warns that a medium term high is in place at .8007 and that a correction that may last some weeks is underway.
Ideally this correction will unfold in three waves back towards medium term support .7600/.7550. Should signs of stabilisation then emerge, it would be used as the set up for long AUD/USD trade looking for a rally towards the .8135 double high.