(Adds budget detail, analyst quotes)
- RBA holds rates, but tweaks to statement draw attention
- Government touts tax cuts as budget returns to surplus
The Australian dollar slid on Tuesday after the country's central bank held interest rates steady but still managed to sound dovish to some, leaving the U.S. currency to benefit from higher bond yields.
There was less reaction to the annual budget from Australia's conservative government which came laden with tax cuts and spending plans in the run-up to an election in May.
The Aussie dollar AUD=D3 was off 0.5 percent at $0.7072, as its U.S. counterpart gained in the wake of strong U.S. factory data.
The surprising resilience in U.S. and Chinese data did help counter fears of a global recession and underpinned commodity prices, giving the Aussie support on the yen and euro.
The Reserve Bank of Australia (RBA) ended its April policy meeting with rates stuck at 1.5 percent, where they have been since mid-2016.
The central bank dropped its forecast for 3 percent economic growth this year, following disappointing data for late 2018, but reiterated that the jobs market remained strong.
There was also a change to the final paragraph of its statement, adding a line that the board will "continue to monitor developments and set monetary policy to support sustainable growth in the economy".
That was the first alteration in at least a couple of years. "The changes to the last paragraph hint at a more active central bank," said Su-Lin Ong, head of Australian fixed income strategy at RBC Capital Markets.
"It may simply be stating the obvious, but it may also hint at a shift to an easing bias in May."
Yet the RBA stopped well short of adopting the blunt language of the Reserve Bank of New Zealand (RBNZ), which startled markets last week by stating the next move in rates would likely be down.
"Presumably the RBA can still see scenarios where interest rates may rise. Or fall," said Michael Blythe, chief economist at CBA.
"The proximity to the Budget serves as a reminder that Australian policymakers have other options," he added. "Fiscal settings can be adjusted and income tax cuts are likely. Income tax cuts are the better choice for dealing with consumer risks."
The government duly delivered, announcing A$158 billion ($112 billion) in proposed tax cuts over the next decade primarily aimed at middle-income earners.
It also estimated a budget surplus of A$7.1 billion in the fiscal year ending June 2020 thanks to higher prices for commodity exports and rising revenues from households.
Interest rate futures
0#YIB: are wagering on a quarter point easing by August or September. A move in May is thought unlikely since it would be just before the federal election and the government is trailing badly in the polls.Australian government bond futures hardly moved, with the three-year bond contract YTTc1 down 1 tick at 98.655. The 10-year contract YTCc1 dipped 1.5 ticks to 98.1700.
Investors have long priced in a return to budget surpluses, and a corresponding decline in issuance, while Australia's triple A credit rating was not under threat.
The New Zealand dollar NZD=D3 had eased to a three-week low at $0.6765 after a disappointing survey of business confidence reinforced expectations of policy easing there.
A net 29 percent of firms surveyed expected general business conditions to deteriorate, compared with 17 percent in the previous quarter.
