Market response to April RBA rate decision - Westpac

Analysts at Westpac lists down the FX and rates market response to April RBA rate decision.

Key Quotes

“The more optimistic global picture painted by the RBA describing the global economic pickup as "broad-based", the guidance that the "Bank’s forecasts for the Australian economy are little changed" plus the more balanced view on the Australian employment situation gives today's RBA Monetary Policy decision a slightly more positive feel. This has helped the A$ pop higher, and in the short term, it feels as if this story can continue. Risk sentiment appears strong post the recent holidays; infrastructure announcements in Australia appear to be being welcomed by markets and Westpac expects to see a fresh record trade surplus in March.”

“All these factors suggest we may see some further strength in the short term, and a move towards 0.76 feels possible. However, we remain of the view that the A$ should be capped by 0.7600/50. With the FOMC likely to raise rates in June and our forecasts for weaker commodity prices in H2, we see the A$ weaker later in the year.”

“Rates Perspective

• No real surprises from RBA statement, and to be fair, none was expected. Rates markets largely shrugged shoulders, with little movement upon RBA release. If anything the commentary about global economy and domestic inflation was marginally more positive (following CPI), and the statement perhaps reveals SOMP forecasts “Growth is expected to increase gradually over the next couple of years to a little above 3 per cent”. So nothing there to significantly alter AU front end pricing. While wages and housing outlook should ensure RBA remains on hold for some time. 
• That suggests that carry-trades will remain the favoured tactical approach in the AU rates space. Our favour such trade at present is to be received 3yr swap EFP, which would narrow on any further outright yield uplift, as we think bond markets are vulnerable to more hawkish rhetoric from the US Federal Reserve, which is likely to attempt to raise market expectations for a June rate hike.
• At the same time, the Budget looks to represent an interesting change in rhetoric from the Government, and appears supportive of future “good debt” infrastructure commitments. So while there is no firm detail yet, this should at the margin keep long-end curves supported, also reinforced by Mnuchin’s comments on ultra-long UST issuance.”