At their last central bank meeting, the RBA gave three criteria for normalising policy. They were 1) the action of other central banks, 2) the behaviour of the bond market, and 3) progress towards full employment and inflation targets. All three targets have now been met.

Australian bond market

Like other bond yields Australia’s bonds have been selling off, sending yields higher.

Other Central Banks

There is a global pivot towards hiking and when you consider that last year the Fed was not planning on hiking interest rates until 2024 you can see the shift. The Fed is currently expected to hike 3 or 4 times this year now. The BoE surprised markets with a 15bps rate hike and many analysts have been rising higher interest rate expectations.

Employment

Since the last meeting, Australia has seen two very strong jobs report. The first one after the RBZ meeting saw 350K+ jobs added, and the jobs print last week saw expectations beaten, unemployment hit a 13 year low and the headline figure beat expectations showing growth of over 60K+ jobs. Over 40K+ of these were full time. This increased expectations of the RBA turning more hawkish and Westpac brought forward their first interest rate hike projections (15bps) for the RBA to August this year from February 2023.

Inflation

Inflation data is moving higher with the QQ trimmed reading at 1.0% vs 0.7% and the YY reading at 3.5% vs 3.2% expected. The annual trimmed mean gauge was at 2.6% vs 2.3% expected and that sent bond yields surging higher as all the pieces of the jigsaw are now in place for the RBA to end its bond-buying program.

AUDCAD upside
The market is very aggressively pricing in 5 or 6 rate hikes for the BoC this year. If the BoC are more dovish at their meeting today then AUDCAD upside looks like a reasonable outcome.