Australian bonds rise as investors remain cautious ahead of RBA’s policy meeting

The Australian bonds gained Monday as investors remained cautious ahead of the Reserve Bank of Australia monetary policy meeting scheduled to be held on Tuesday at 04:30 GMT.  Also, safe-haven assets demand rose following weak Chinese PMI reading.

The yield on the benchmark 10-year Treasury note, which moves inversely to its price, fell 1/2 basis point to 2.69 percent, the yield on 15-year note also slumped 1 basis point to 2.99 percent and the yield on short-term 2-year traded nearly 2 basis points lower at 1.81 percent by 02:30 GMT.

Australian market is sensitive to Chinese economic data, China’s non-manufacturing PMI fell to 54.5 in July from 54.9 in June and manufacturing PMI fell to 51.4 in July from 51.7 in June; estimates were for 51.5.This has pushed demand for the safe-haven assets.

The Reserve Bank of Australia in its August monetary policy meeting is widely expected to leave its key interest rate at a record low of 1.50 percent and remain optimistic in its outlook for the economy, notwithstanding the impact of the higher AUD. The policy statement will highlight that the growth outlook remains positive, there is still some spare capacity in the labour market and inflation is likely to pick up only gradually. Broadly speaking, we expect the RBA’s economic outlook to be very similar to that contained in the May statement, although with perhaps more confidence that the underlying forecasts will eventuate.

On the other hand, the inflation data released last week, the consumer price index (CPI) rose 0.2 per cent in the second quarter and 1.9 percent for the year, well short of the 2.2 per cent increase expected. Underlying inflation rose 0.5 percent in the second quarter, from the first, which matched market forecasts. The annual rate of 1.8 percent was again short of the Reserve Bank of Australia's long-term target band of 2 per cent to 3 per cent, where it has been since the start of 2016.

Meanwhile, The S&P/ASX 200 index traded 0.13 percent, or 7.5 points higher to 5,663.50 by 03:50 GMT, while at 03:00GMT, the FxWirePro's Hourly AUD Strength Index remained neutral at 1.22 (a reading above +75 indicates a bullish trend, while that below -75 a bearish trend). For more details, visit http://www.fxwirepro.com/currencyindex

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