Originally published by AxiTrader
The Australian dollar is back above 80 cents for the first time since 2015 this morning after the Fed delivered a dovish statement focused on inflation - or lack thereof.
That move above 80 cents capped off a strong recovery from yesterday's lows after the combination of lower than expected headline inflation and RBA governor Lowe's speech put the Aussie under a little downward pressure.
That saw AUD/USD trade to a low in the 0.7875/80 region - equal to last week's Guy Debelle induced low - before the buyers stepped back in and took it higher as they awaited the FOMC statement.
But the release of what has been read by traders - correctly in my opinion - as a dovish hold by the FOMC saw the US dollar collapse across the board. That drove the Aussie to a high around 0.8010/15.
With the current momentum, it doesn't look done yet.
I say that because while the backdrop for AUD/USD strength has built domestically - through growth, internationally, through improved economic growth, via commodity market rallies, and with the improvement in AUD-USD bond spreads, this last leg is about the US dollar.
And on that front, it is not clear where the circuit breaker is going to come from right here or right now to get buyers back supporting the dollar.
Certainly, as I have written this week, the US dollar's weakness now more than factors in the weak data flow we have seen over recent months.
But in the same way as humans don't feel levels, they feel changes, the FOMC statement this morning is a change.
What's apparent is that, like me, the market was looking for a more hawkish tone from the Fed. A focus on the strength of the labour market and what that means for growth rather than the obvious concern about the lack of inflation and the handbrake that places on further rate hikes.
The Fed said, "in the “near term” inflation will “remain somewhat below 2%” but “stabilise around the Committee’s 2 percent objective over the medium term”.
That's important as RBA governor Lowe pointed out yesterday.
Lowe said "for a central bank with a single objective of inflation, the answer is relatively straightforward. Inflation is too low, so you do what you can to get inflation up. If inflation doesn't increase, you need more monetary stimulus".
That is specifically applicable to the single mandate ECB, something EUR/USD bulls might have to face later this year. But it is also important for the dual mandate Fed and the conversation around the FOMC table.
On present settings, when the Fed has a bias to normalise rates, it means they have to pause and see how the economy and inflation develop.
Robert Kaplan, president of the Dallas Fed, made that very point recently, Pedro Nicolaci da Costo writes at Business Insider in the wake of this mornings statement.
Kaplan said "I think in these periods where you’re getting conflicting signals, the best course of action is to be patient...I simply want to wait, I want to be patient and review more information to see how the economy is unfolding and see evidence that we’re making progress toward our 2-per cent inflation goal".
And that, folks, is the message currency traders took from the FOMC statement this morning.
It is why the US dollar was sold and the Aussie dollar rocketed.
The question of course, is what's next for the Aussie?
Governor Lowe didn't expressly talk it down yesterday. That's something that might be remedied in next week's statement from him after Tuesday's RBA Board meeting.
In the meantime when I look at the daily charts there is a chance that the rally extends toward 0.8140/50 which is the 138.2% projection of the recent move.
That the market didn't quite pull back to 0.7830 first, before it broke higher this morning, gives me some pause. But it is clear the Aussie retains broad support in the current environment of US dollar weakness, commodities bouncing, risk on, and widening bond spreads.
Here's the weekly chart.
Shorter term, the Aussie moved hard and fast in a short space of time this morning. That suggests there is a chance of some consolidation. 0.7985/90 is first support then 0.7960/70. Below here it could gallop a little lower.
Have a great day's trading.