Australian bonds gain as business conditions fall in November, fuel RBA’s rate cut hopes

The Australian government bonds gained Tuesday after recent data showed that the country’s business conditions fell to the lowest level in 18 months in November, fuelling the Reserve Bank of Australia’s (RBA) rate cut expectations for 2017.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, fell 4 basis points to 2.83 percent, the yield on 15-year note dipped 4 basis points to 3.29 percent and the yield on short-term 2-year slid 1 basis point to 1.87 percent by 04:50 GMT.

Australia’s business conditions slid for the second straight month in November, dropping back to long-run average levels for the first time since April 2015. It came at 5, lower than the October reading of 7, revised higher from 6. This was largely driven by profitability and trading conditions, as employment conditions were steady at already subdued levels.

Moreover, the Australian bonds have been closely following developments in oil markets because of their impact on inflation expectations, which is well below the Reserve Bank of Australia's target. Crude oil prices declined as investors cashed in profits after a long rally following a landmark deal between OPEC and non-OPEC countries, agreeing to cut production for the first time since 2001. The International benchmark Brent futures fell 0.2 percent to $55.60 and West Texas Intermediate (WTI) dipped 0.36 percent to $52.64 by 05:00 GMT.

Markets will remain focused on the Federal Reserve last monetary policy decision for 2016, which is scheduled to be released on December 14. The Federal Reserve is expected to increase the target range of the key interest rate by 25 basis points to 0.50-0.75 percent, with a unanimous decision. Little change to the statement, though the Committee is likely to acknowledge that market-based measures of inflation compensation have risen further.

Meanwhile, the benchmark Australia's S&P/ASX 200 index traded 0.07 percent lower at 5,499.5 by 05:00 GMT. While at 05:00 GMT, the FxWirePro's Hourly Australian Dollar Strength Index stood neutral at +18.36 (higher than +75 represents bullish trend).