📝We Still See Downside Risks In AUD After RBA: Westpac

Heading into the announcement, OIS pricing for June was at 0.65%, implying a 30bp hike, or a 60% chance of a 50bp move. So, while the 50bps hike was a surprise, we suspect it will be well received by those who feared the RBA risked moving too slowly.

10y futures are likely to continue to trade heavily as the markets reassess the terminal cash rate (currently around 3.75% by mid next year). While that is significantly higher than Westpac expects, this hawkish pivot from the RBA will keep risk rewards around potential outcomes skewed to the high side for some time. We expect that the 3-10yr curve flattening impulse will continue near term, with the pricing for each meeting live for either a 25bp or 50bps hike as the inflation and labour outlooks evolve.

But we still see downside risks to the Aussie over the course of June. The FOMC’s quantitative tightening is under way and in coming months will accelerate, while+ 50bp is locked in for both next week and late July, with talk of a September pause doused by key Fed officials. This is strong yield support for the US dollar.

A$ correlations with equities have been elevated in recent weeks. Given the Fed outlook and the growth-squeezing impact of soaring energy prices, global equity sentiment is likely to remain fragile for some time.

- Westpac Strategy