The RBA’s Dovish Hold | MACRO MINUTES

  • Friday, October 7, 2016

Welcome to The Signal’s weekly “Macro Minutes.” Each week, we analyze the most important communications from a specific region and provide insight based on our quantitative analysis of central banks.

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Contrary to Prattle’s policy forecast, the Reserve Bank of Australia held rates on Tuesday. The market response to the policy decision, however, was right in line with Prattle’s sentiment score.

While our data is often implies both policy direction and market response–as last month’s 96% projection accuracy attests–it’s always important to remember that for a trader, market response is really the only thing that matters. And market response is exactly what Prattle’s data was built to predict.

Figure 1 captures the Australian equity market’s response to the RBA release.

Figure 1: ASX 200

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The dovish tone* of the RBA’s release (residual** -1.96) inspired the Australian equity market to leap almost 28 basis points from the time of the release. As the market was pricing in 0% chance of a cut, traders positioning themselves according to market expectations would have had little reason to anticipate this sort of price movement. Because the significance of Prattle’s data extends beyond the specifics of policy to the reality of market reaction, the strongly dovish score the communication received on release could have led Prattle users to project an equity market rally.

The Signal Team

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* Prattle’s models are based on the historical relationship between central bank language and market reaction, which is used as basis of evaluation for future communications. The scores are normalized around zero and range between -2 and 2, negative numbers indicating dovishness and positive numbers indicating hawkishness.

** Residual scores represent the tone of a communication compared to the rolling, 12-month average for that individual communication type or speaker. Raw scores represent the tone of a communication compared to the average of all communications.

Disclaimer: the forecasts provided herein are based upon sources believed by Prattle Analytics, LLC D/B/A Prattle, to be reliable and to be developed from models which are generally accepted as methods for producing economic forecasts.

Prattle cannot guarantee the accuracy or completeness of the information upon which this Report and such forecasts are based. This Report does not purport to disclose any risks or benefits of entering into particular transactions and should not be construed as advice with regard to any specific investment or instance. The opinions and judgments expressed within this Report made as of this date are subject to change without notice.

Copyright © 2016 Prattle Analytics, LLC.