AUD rebounds as Fed fails to meet Hawkish estimates
Daily Currency UpdateFinally some respite for the AUD as commodity currencies and risk assets rally in the wake of the FOMC rate update and statement. Having tested a break below US$0.6850, the AUD slowly edged back toward US$0.69 through the domestic session, continuing the upturn through offshore trade and into the all-important US Federal Reserve policy meeting. The AUD then lurched higher after voting members within the Federal Open Market Committee offered a statement that failed to meet markets' hawkish expectations. Policymakers opted to raise the Fed Funds rate a staggering 0.75% in a move that would ordinarily send shockwaves through the market. Instead, investors having priced in the move following last week’s shockingly robust CPI print and key media analysis throughout the week shifted their focus to the accompanying policy statement. The statement showed the Fed adjusted its median estimates for rates into the end of the year to 3.375% meaning they anticipate only a further 150 basis point adjustment through the next 4 meetings. When coupled with comments from Fed Chair Jerome Powell wherein he suggested policymakers “do not expect moves of this size to be common” investors were prompted to downgrade aggressively hawkish estimates. The AUD jumped through US$0.70 touching highs at US$0.7025 before settling marginally above the psychological threshold.
In other news, the Fair Work Commission elected to raise the minimum wage by 5.2% in response to recent inflation pressures. The move supports calls wage growth will pick up and should reflect through the latter half of Q2 and into Q3.
Our attentions turn now to domestic unemployment and labour market data. We expect a strong print and further decline in the unemployment rate to 3.8%. Such a read will allow the RBA license to normalise monetary policy at pace and may well lend some support to the AUD and allow a consolidation above US$0.70.
Key MoversRobust price action through trade on Wednesday saw the USD fall against a basket of major counterparts as improved risk sentiment and a correction across US yields helped elevate commodity currencies and risk assets. As expected the Fed raised rates by 75 basis points at its June meeting overnight and in keeping with the recent trend of selling in the aftermath of a rate hike, markets forced the dollar off multi-year highs as Fed officials failed to offer an accompanying statement that met investors hawkish expectations. Having aggressively lifted rates markets immediately began pricing in a second 75 basis point adjustment in July but were forced to quickly unwind moves as policymakers suggested such a move would not be commonplace while setting medium estimates for the Federal fund rate at 3.375% at the end of 2022. Markets were forced to downgrade estimates for peak interest rates and dial back expectations for future interest rate adjustments. Two and Ten-year yields fell forcing the dollar index lower.
The euro failed to take advantage of the US D downturn closing flat on the day. The single currency poked its head above US$1.05 after the ECB called an emergency meeting to discuss market conditions and the sharp correction in peripheral bond spreads after Greek and Italian bonds plunged 45 and 46 basis points respectively. The ECB elected to employ tools and act against defragmentation risks as it unwinds its QE program and begins raising interest rates. The announcement helped bolster risk demand.
Our attentions turn now to the Bank of England policy update. We expect only a 25 basis point hike as policymakers attempt to tread a fine line between controlling inflationary pressures and avoiding recession. Having recovered back above US$1.2150 a dovish policy update could drive the GBP back below US$1.20.
- AUD/USD: 0.6850 - 0.7080 ▲
- AUD/EUR: 0.6580 - 0.6780 ▲
- GBP/AUD: 1.7280 - 1.7480 ▼
- AUD/NZD: 1.1020 - 1.1220 ▲
- AUD/CAD: 0.8900 - 0.9100 ▲