Aussie steady in face of Hawkish FOMC

AUD

The Australian dollar opens this morning largely unchanged when compared with the same moment yesterday yet enjoyed wildly varied fortunes through trade on Wednesday. Having maintained a tight 30-point trading band for much of the domestic session the Aussie crept higher and moved back through 0.7600 shortly after London’s open, gathering momentum into the Fed’s FOMC statement and touching intraday highs at 0.7610. The AUD then tumbled losing almost a cent as the Fed announced a 25 basis point increase in bench mark interest rates forcing the AUD to lows at 0.7532. The knee jerk reaction was then gradually unwound as investors responded to the commentary delivered in the accompanying rate statement.

While flat over 24 hours we still maintain medium and long term downside risks for the AUD are in play. Having signaled the possibility of 2 more rate amendments before years end and hinted at three rate hikes in 2019 the US Dollars yield advantage over major currency counterparts is only expected to grow. The RBA is still some way off raising domestic interest rates and while broader economic signs are positive the lag in wage growth, labour market slack and inflation expectations is expected to continue through the short term making it increasingly difficult for the board to justify a rate hike. With short term ranges expected to fluctuate between 0.74 and 0.77 we will be looking to a possible moderation into years end back toward the lower end of this handle.

Attentions today turn to a crowded calendar with domestic employment numbers and China’s industrial production report the primary markers driving direction through the local session.

 

AUD / NZD

Expected Range: 1.0710 – 1.0830

The New Zealand Dollar remained resilient in overnight trading to open this morning at 0.7028. Oscillating between 0.6975 and 0.7050, the market enjoyed a period of turmoil as the US Federal Reserve hiked rates during the FOMC session. While widely expected, and indeed priced in by markets, investors underwent a session of price discovery, taking into account a hawkish statement from the Federal Reserve.

Across the Tasman, the Australian Dollar also remains relatively unchanged against the Kiwi with only a slight uptick to 0.9270. All other crosses have been fairly insignificant with little to write home about.

Closer to home, the domestic macro-economic calendar has had little to excite local traders this week with direction being dictated by news abroad. Turning to our neighbours in Australia, investors look forward to an employment reading shortly. Further abroad, there is the always significant Chinese industrial production and retail sales numbers to digest. Subsequently, the UK and US will also release their retail sales report. Closing out a busy day are the potentially significant press conferences from the ECB and BOJ.

 

GBP / AUD

Expected Range: 1.7530 – 1.7780

The Great British Pound is weaker this morning when valued against its US counterpart. The Sterling reached an overnight low of 1.3308 as the US Federal Reserve sent a hawkish message to markets by raising interest rates by a quarter point and indicated that rate hikes could be faster and higher than previously forecast.

In local news in the UK Theresa May avoided defeat on Wednesday evening of her Brexit policy after a majority of MPs (shadow cabinet office ministers) voted with the UK government to defeat a number of amendments. As a result five UK Labour frontbench MPs resigned after the amendment defeat. Attentions now turn to today’s May retail sales data print with expectations for a 0.5% m/m rise in total sales volumes and a 0.4% m/m rise in ex-fuel volumes.

From a technical perspective, the GBP/USD pair is currently trading at 1.3382. We continue to expect support to hold on moves approaching 1.3340 while now any upward push will likely meet resistance around 1.3410.

 

AUD / USD

Expected Range: 0.7530 – 0.7670

The USD enjoyed mixed fortunes through trade on Wednesday as investors responded to the FOMC’s decision to raise interest rates. Most major counterparts edged higher against the world’s base currency prior to the rate announcement before plunging lower in the immediate aftermath. The USD surged against the EUR, JPY, GBP and CAD before giving up gains as markets reacted to the commentary that followed the rate hike. Despite being more hawkish than most anticipated the commentary perhaps didn’t go far enough in assuaging market demands for a 4th rate hike this year. Investors have unwound the likelihood of four rate hikes this year over the past few weeks and were looking for a clear signal from the FOMC that a steepening in the monetary policy path was still on the table.

While the Fed did raise its target range and upgraded its assessments for broader growth it wasn’t enough to drive markets as investors attentions perhaps partially turned toward the ECB policy decision Today. Optimism surrounding the upcoming monetary policy meeting has improved through the last week as commentary from key ECB officials suggest the Board will discuss tapering the QE program into the end of the Year. With the bar for a hawkish review now set considerably higher than this time last week anything short of confirmation from the ECB that QE will end in December leaves the Euro open to a downward correction and revision back below 1.17.

Attention now sit firmly with the upcoming ECB policy announcement as the key drive governing direction into Friday.

 

AUD / EUR

Expected Range: 0.6350 – 0.6530

The Euro was able to reverse all its post-FOMC decline and ended the session almost 0.4% stronger versus the USD, at 1.1791. EURUSD traded all the way down to 1.1730, the support level highlighted on Yesterday’s note, after the US Central Bank hiked interest rates and updated their projections for further increases this year, supporting the USD.

Rumours about potential US tariffs on Chinese goods to be announced this Friday put downward pressure on the USD and the EURUSD was able to recover all the lost ground and trade to session highs at 1.18, finally settling at 1.1791.

Next up is the ECB, but before that, we’ll get May Consumer Price Index numbers for Germany.

Support and resistance levels should remain intact, at 1.1730/1.1840 respectively.

 

AUD / CAD

Expected Range: 0.9780 – 0.9880

Like other major currencies, the CAD was down against the USD following the FOMC announcement, with USDCAD trading all the way up to 1.3050 (around the technical 1.3040 resistance level) but managed to recover the reverse earlier losses to close almost 0.25% stronger versus the greenback, at 1.2987.

The loonie was also supported by a 0.30% spike in WTI crude oil prices following an inventories weekly report that showed a higher than expected draw in US stockpiles.

First support and resistance levels for the USDCAD remain intact at 1.2910/1.3040 respectively.