Originally published by AxiTrader
Key Takeaway
It's an idiosyncratic forex market at the moment. By that I mean that as we await the Fed and an overall move in the US dollar traders are focussing on the individual merits, and moves, of particular currencies.
So last night while Brexit hit the pound and political issues hurt the euro the Australian dollar was able to hang relatively tough after support in the guise of higher iron ore and base metals prices combined with a little rally in US bonds to leave it around 0.7555 this morning.
That's not to say the Aussie is out of the woods. But equally it's not to say the Aussie is about to get hammered again. It's just a reflection of the absence of US dollar moves Aussie specific information is driving the price.
That could all change at 5 am tomorrow morning when, as widely anticipated by the market, the Fed hike rates. But it's what the Fed says, what the dot-plot reveals, and how chair Yellen handles her press conference which will decide the fate of the US and Australian dollars.
What You Need To Know
Iron ore prices in China rallied another 3.6% yesterday to add to this week's solid turnaround in prices. That was after the data deluge yesterday showed investment and industrial production grew faster than the market anticipated.
That data also helped base metal prices with copper up 1.1% in what was a generally good day for base metals.
Throw in a stalling in the selloff for US bonds which saw the 10-year treasury back at 2.6% - holding below the range high for the post trump selloff - and we have the preconditions for relative strength in the Australian dollar.
So it's holding it's own at 0.7557 against the US dollar, with EUR/AUD down at 1.4030, GBP/AUD at 1.6068.
Now we wait for the release of the FOMC's decision tomorrow. My sense is it should be US dollar positive.
I say that because even though the market is convinced the Fed will hike it’s the language it uses in the statement, the dot-plot of expected moves in the next year, the new fan chart, and Janet Yellen’s press conference which will be the big movers. when the Fed announces its decision early tomorrow morning. My sense is that the Fed will signal at least another 2 hikes this year and another 3 to 4 in 2018. Chair Yellen and her colleagues have been very patient and let the US economy and inflation lift toward their goals. Now they’ll be trying to normalise policy so that they don’t have to hike aggressively at some point later this year.
And I expect all of these to reflect what the various Fed speakers said a couple of weeks back - the US economy is closing in on full employment, inflation is rising (PPI last night CPI tonight) and as a result at least two more hikes this year and then multiple hikes in 2018 will be necessary. when the Fed announces its decision early tomorrow morning. My sense is that the Fed will signal at least another 2 hikes this year and another 3 to 4 in 2018. Chair Yellen and her colleagues have been very patient and let the US economy and inflation lift toward their goals. Now they’ll be trying to normalise policy so that they don’t have to hike aggressively at some point later this year.
Chair Yellen and her colleagues have been very patient and let the US economy and inflation lift toward their goals. Now they’ll be trying to normalise policy so that they don’t have to hike aggressively at some point later this year or next.
As a reminder the Atlanta Fed's Taylor Rule estimates Fed funds should be a little north of 3%. SO the Fed has got some work to do.
But while the Fed signals rate rises tonight I expect Yellen to seek to focus discussion on the end rate of this Fed rate rise cycle, which should not be too high relative to history, rather than the number of hikes. The question is whether the market wants to listen.
We'll know tomorrow.
Looking at the chart there are pretty clear parameters for an AUD/USD break that occur to me. 0.7485/80 on the bottom side and 0.7590 on the topside.
We are kind of in the middle right now. But a break in either direction will likely see a decent amount of money flow in behind the move.
Have a great day's trading.