Synopsis:

MUFG analyzes the reaction of the Australian dollar and market expectations following the Reserve Bank of Australia's (RBA) less hawkish than anticipated policy update during this week's May meeting.

Key Points:

• AUD Movement: The Australian dollar registered significant movements, weakening in the Asian trading session, largely influenced by the RBA's latest policy update.
• Market Expectations: Prior to the meeting, Australian rate markets had largely priced out rate cuts for the year and began to anticipate potential rate hikes, evidenced by a notable increase in the implied yield on December 2024 three-month interest rate futures.
• RBA Policy Signal: Contrary to market expectations for a more hawkish stance, the RBA's updated policy statement was less assertive about imminent rate hikes, leading to a recalibration of market expectations and a subsequent decrease in short-term rates by approximately 8bps.
• Inflation Outlook: The RBA noted that inflation appears to be declining more slowly than previously projected, acknowledging ongoing economic pressures.

Conclusion:

The RBA's May meeting has adjusted market perspectives on the future direction of Australian monetary policy, signaling a more cautious approach than many anticipated. This shift has implications for the Australian dollar and could influence investor strategies concerning Australian assets, particularly as the market digests the slower than expected decline in inflation.