Price action contained as Fed officials attempt to douse market expectations
Daily Currency Update
The Australian dollar tracked within a relatively narrow range through trade on Monday, bouncing between US$0.6690 and US$0.6735. With little of note on the domestic docket, the AUD edged toward levels not seen since mid-July marking session highs at US$0.6734.Market expectations the Fed will begin paring rate hikes as early as March 2024 continue to spur AUD gains and direction, with comments from key officials sort to douse market exuberance. Policymakers questioned market pricing and suggested that price action and expectations have disappeared from reality. US yields edged higher in response and the AUD tracked back below US$0.67 through the overnight session.
With most key risk events now behind us, our attention turns to the RBA policy meeting minutes ahead of the Bank of Japan (BoJ) policy update. Given the statement following the RBA December meeting was long and detailed in its justification for the November rate hike, we expect little to no new insight into RBA policy moving into 2024.
The market is still pricing in the chance of one final hike, yet we don’t expect the minutes will offer any insight or inference as to when the RBA may pull the trigger and as such price action should be well contained. Thus, BoJ remains our key focus. A surprise rate adjustment could spur significant market volatility.
Key Movers
Price action across currency markets was largely contained through trade on Monday as market attention turned to the BoJ policy meeting. US treasury yields edged higher as Fed officials pushed back against market expectations for rate cuts. Market pricing for a rate cut as early as March 2024 spiked following the Fed policy meeting last week, driving the USD lower.Policymakers have since attempted to douse market pricing for a rate adjustment, suggesting the market has gotten “a little ahead of itself”, reiterating the importance of continuing to assess conditions and ensure policy remains restrictive to bring inflation back to target. With US yields higher, the USD edged upward against the euro, while the pound slipped back below 1.2650 and the yen underperformed.
Our attention turns now to the BoJ policy meeting and announcement. While we expect they will leave policy unchanged, there is the possibility of a surprise move to lift rates out of negative territory. Officials have signalled the time has come to end the Bank's uber-accommodative rates platform and while we don’t expect they will pull the trigger until Q1 2024, a shock move will trigger a significant yen rally.
Expected Ranges
- AUD/USD: 0.6650 - 0.6780 ▼
- AUD/EUR: 0.6080 - 0.6180 ▼
- GBP/AUD: 1.8700 - 1.9100 ▼
- AUD/NZD: 1.0720 - 1.0820 ▼
- AUD/CAD: 0.8920 - 0.9020 ▲