AUD/USD: Risks to the mid-0.76s this week - Westpac

Sean Callow, Research Analyst at Westpac, suggests that with its commodity price support waning and trade tensions ongoing, AUD/USD should find only brief support from the Fed policy meeting if the FOMC retains its central projection of 3 hikes this year.

Key Quotes

“Overall risks for AUD/USD to the mid-0.76s this week.”

“The US dollar was mixed last week, posting sharp gains against commodity currencies AUD, CAD and NZD while ticking down a little against the Japanese yen and British pound. We did not see a commodity price rout but March so far has seen notable declines in prices of Australia’s top two exports, iron ore and coal.”

“We note too that the ‘dollar bloc’ currencies tend to be sensitive to any threat to global trade volumes, as the White House reportedly weighs tariffs on a significant portion of imports from China. The steel and aluminium tariffs barely touched China.”

“But of course the global market focus this week will be on the Federal Reserve’s policy committee, the FOMC. It is Jay Powell’s first meeting as chairman, though he has been on the FOMC since 2012. There will be a lot for markets to absorb, starting from 5am Thursday Sydney time. Markets are virtually 100% priced for the benchmark federal funds rate to be raised 25 basis points to 1.50-1.75%. Note that this would finally lift the funds rate above the RBA cash rate.”

“So the decision on the funds rate won’t be the focus. Instead, attention will be on Powell’s press conference and the quarterly forecasts by FOMC members. These should see an increase in the median GDP projection for 2018, from 2.5% in December. Perhaps most market-sensitive is the median projection for the funds rate. If the median “dot” for end-2018 rises by 25bp to 2.25-2.50% i.e. from 3 to 4 rate rises this year, US yields and the US dollar should rise. If not (our base case), we could see a kneejerk USD decline that benefits AUD/USD.”

“AUD/GBP and AUD/NZD also face risk around central bank decisions this week, with the Bank of England and RBNZ both meeting. Sterling probably has most at stake, with markets skittish about how much risk to price in for a 10 May rate hike (currently around 65-70%).”

“Australia’s domestic calendar should have less impact on AUD than the FOMC meeting. The RBA’s firmly on hold stance limits the interest in the March meeting minutes. The labour force survey is closely watched every month, but given that employment has risen for a record 16 consecutive months, a single month’s survey will not change the overall picture. Consensus is for a 20k rise in total employment in Feb and for the unemployment rate to hold at 5.5%, just above 5 year lows. Westpac is on 25k and 5.5%.”

“This suggests AUD/USD is largely driven by US dollar sentiment, but with a downward bias from commodity prices, since it has been trading on the high side of fundamental ‘fair value’ estimates. If the FOMC produces no change in the 2018 funds rate “dot” then AUD/USD should benefit. But overall, the Fed’s message should be upbeat enough to leave the US dollar on a decent footing against the likes of AUD, EUR and NZD. This would see AUD/USD print fresh lows since Dec 2017, in the mid-0.76s.”

“Event risk: RBA Mar minutes, UK Feb CPI, NZ dairy auction (Tue), UK Jan unemployment, FOMC meeting concludes (5am Thu Syd) (Wed), RBNZ policy decision, Aust Feb labour force, Policy decisions in Philippines, Taiwan and Indonesia, Eurozone advance Mar manufacturing surveys, EU leaders summit, Germany Mar IFO business sentiment, Bank of England MPC meeting, UK Feb retail sales (Thu), US steel and aluminium tariffs commence, Japan Feb CPI, US Feb durable goods orders, Canada Jan CPI (Fri).”