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Aussie buoyed as Fed proffers major shift in perspective

By OFX

The Australian dollar jumped through trade on Wednesday, extending moves beyond 0.71 to touch intraday highs at 0.7146 and close the session as one of the day’s best performers. Having offered little throughout the domestic session the AUD was buoyed by a Dovish FOMC policy statement. The Fed fell in line with market expectations, announcing it does not intend to raise interest rates again this year. The AUD immediately jumped 50 points before profit taking took the sting out of the rapid extension and the Aussie settled back to open at 0.7115.

Having pushed extended moves beyond 0.71 attentions now turn to today’s labour market report. Employment change and unemployment numbers for February are due and sharply in focus. The RBA has recently pointed to the labour market as a key lagging indicator of broader economic health. Sustained strength through the last 24 months has helped fuel hopes of an eventual uptick in GDP and inflation, however sustained softness and a per capita recession suggest employment growth is not flowing through to the wider economy. A soft read and an uptick in unemployment will amplify calls for a rate cut and likely undo the recent uptick the AUD has enjoyed, while a surprise to the upside and a strong employment read should foster an extended rally and a test of resistance at 0.7150.

The New Zealand dollar pushed through key resistance at 0.69 to open this morning slightly higher at 0.6920. The Kiwi benefitted primarily from the dovish FOMC statement released overnight which indicated the Federal Reserve did not intend to raise rates this year. The Fed also mentioned that it would end its balance sheet reduction at the end of September, sending the USD rate sharply lower.

On the domestic front, NZ GDP q/q figures released today came in as widely expected at 0.6%, albeit higher than last quarter and further supporting the Kiwi. The rest of Thursday proves uneventful locally but there is Australian employment figures that will come into focus.

The Great British Pound underperformed in overnight trading as the March 29th deadline gets closer and closer. Opening this morning at 1.3190 against the Greenback, the Sterling has come under pressure from increased Brexit uncertainty.

Prime Minister Theresa May bowed to pressure from her Brexit leaning cabinet members and has requested only a short delay from the EU to June 30th. In response, the EC President Donald Tusk offered that a short-term delay is possible but contingent on the UK parliament passing Theresa May’s Brexit bill and heightening the importance of the third Meaningful Vote (potentially early next week). From here, there is considerable uncertainty should May’s deal be voted down a third time. May has implied that she would rather resign than seek a longer extension and the EU has confirmed it wants assurances that there will be a new political process if it were to grant an extension, whether than means elections, a second referendum or a new cross-party initiative.

In economic news, the UK headline CPI was slightly higher than expected while core CPI was lower. Both numbers came in below the Bank of England’s 2% target. Moving into Thursday, all eyes remain fixed on Brexit with some focus on the Bank of England meeting and a retail sales report.

The United States dollar fell against the Australian dollar yesterday amidst a dovish FOMC statement as the Federal Reserve maintained its line about being patient with future policy adjustments and stated they do not intend to raise rates this year. Eleven of the seventeen officials projected no rate hikes for this year, signaling that the Fed’s tightening cycle is likely over. Fed’s Powell in the press conference stated that their balance sheet will be around 17% of GBP at the end of 2019, vs 25% at its peak.

In terms of macroeconomic news, the ongoing US-China trade war continues to loom on the horizon without a specific date. We see the Philadelphia Manufacturing Index being released later tonight, which is expected to have a medium impact on the USD. It is a survey of manufacturers in Philadelphia, and as businesses react quickly to changing market conditions it can be a leading indicator of economic health.

The USD opened at 1.4054 against the AUD this morning.

The Euro jumped back through 1.14 on Thursday, buoyed by the Fed and FOMC’s dovish policy statement. Having traded sideways for much of the day the 19-nation combined unit bounced upward in the minutes following the Fed’s committee meeting, advancing to touch intraday highs at 1.1441. While maintaining a message of patience through January and February the Fed proffered a major shift in perspective, pushing back expectations for tighter monetary policy as the threat of inflation is expected to remain muted through the foreseeable future.

The Fed’s dovish about turn has perhaps eased some of the short-medium term burden on the Euro as the anticipated gap between US and European interest rates will remain largely unchanged through much of the next 12 months. While US and German yield fluctuations will continue to drive momentum the Fed’s amalgamation to the Global Central Bank ethos of looser monetary policy has reduced the more imminent risks of a significant extension beyond 1.1250 and on to 1.1050. We expect the Euro to remain largely range bound between 1.1250 and 1.1650 through Q2.

Attentions today turn to the EU Economic Summit as the primary marker for direction through trade on Thursday. Officials will meet in Brussels to vote on whether an extension to Brexit and Article 50 should be granted.

The Canadian dollar rose against the United States dollar yesterday to open at 0.7515 this morning. This was mostly due to the dovish FOMC statement by the Federal Reserve earlier this morning, resulting in a weaker USD. The Federal Reserve maintained its line about being patient with future policy adjustments and stated they do not intend to raise rates this year.

The CAD CPI data will be released tonight, showing changes in the price of goods and services purchased by consumers. This is the most important inflation-related release due to its earliness and broad scope. Consumer prices account for most of the overall inflation and rising prices can lead the central bank to raise interest rates.