The Australian dollar and bond yields experienced a volatile session following the release of the third quarter GDP report, initially declining before reversing course. The dollar and bond yields initially dipped after the Q3 GDP showed the economy expanded by 0.4 per cent, falling short of the anticipated 0.7 per cent. This raised speculation that the Reserve Bank of Australia (RBA) might still consider cutting rates next year.
However, a closer examination of the report revealed upward revisions to the second quarter figures. The data also indicated that the economy is operating near its capacity, reinforcing the RBA’s concerns about potential overheating. Consequently, bond traders have adjusted their expectations, now pricing in a roughly 77 per cent probability that the central bank will increase the cash rate in 2026.
Prior to the GDP data release, the market had priced in a 97 per cent chance of a rate hike in 2026, spurred by RBA Governor Michele Bullock’s remarks in Canberra about the implications of persistent inflation on future monetary policy. These comments had initially strengthened expectations of a more hawkish stance from the central bank.
The Australian dollar is currently trading at 65.71 US cents, nearing a three-week high. Three-year bond yields have settled at 3.9 per cent, while the 10-year bond yield is at 4.6 per cent, reflecting the market’s reassessment of the RBA’s likely course of action in the coming years.
