The US dollar and bond yields rose after Fed Chair Powell was renominated for the role. The S&P500 is currently up 0.5% on the day. The US dollar index is up 0.5% on the day, and at a 16-month high. EUR fell from 1.1290 to 1.1236 – a 16-month low. USD/JPY rose from 114.10 to 114.89. AUD initially spiked to 0.7273 before falling to 0.7226 – a two-month low. NZD fell from 0.7019 to 0.6954. AUD/NZD rose from 1.0345 to 1.0402. US 2yr treasury yields rose from 0.52% to 0.58% - a 20-month high, boosted by the Powell reappointment news, while the 10yr yield rose from 1.56% to 1.62%. Markets now fully price the first Fed funds rate hike to be in July 2022. Australian 3yr government bond yields (futures) rose from 1.14% to 1.20%, while the 10yr yield rose from 1.83% to 1.89%. Markets continue to fully price the first RBA rate hike to be in July 2022.
Commodities, Brent crude oil futures rose 1.1% to $80, copper fell 0.3%, gold fell 2.2%, and iron ore rose 3.8% to $95.
Overnight Currency Range
AUD/USD 0.7224 0.7273
EUR/USD 1.1230 1.1296
GBP/USD 1.3385 1.3449
USD/JPY 113.91 114.95
NZD/USD 0.6953 0.7012
USD/CAD 1.263 1.2702
USD/CNH 6.3772 6.3950
AUD/JPY 82.31 83.20
AUD/NZD 1.0343 1.0399
AUD/USD has reversed lower from previous session highs in the 0.7270s, amid a knee-jerk strengthening of the USD after the announcement from the White House that Jerome Powell would be nominated for a second term as Fed Chair. AUDUSD has now slipped back to the 0.7240s, where it still trades with on-the-day gains of about 0.15%. Analysts said that AUD outperformance on Monday could be to do with stronger iron ore prices, as well as positive reopening news in the region.
The A$ should remain under modest pressure given further weakness in Chinese steel prices/ super weak October steel production data, the continued slide in coal markets, the more dovish RBA Governor’s speech to the ABE last week, European Covid cases/ lockdowns, rising tension on the Russia/ Ukraine border, weakness in EM currencies, plus the stronger US$. In terms of specific levels, the bank states that a test down to the 0.7170/ 0.7220 region remains the next objective while gains will be capped by the 0.7290/ 0.7310 region
Powell renomination prompts hawkish reaction….The hawkish kneejerk reaction (i.e. dollar strengthening) to the news of Powell’s renomination reflects an unwind of dovish bets on a Brainard nomination. Had Brainard been nominated to the position of Chairman, the expectation amongst market participants would have been that there would have been a greater tolerance for high inflation and a greater emphasis on patience and returning to pre-Covid-19 employment levels.
Now that he has secured the renomination, some analysts have facetiously joked that Powell might now turn more hawkish, as some other Fed members have judging by recent rhetoric. Whilst this was initially presented by some as a joke, the reaction in bond markets to Powell’s renomination suggests that market participants truly are now betting on some sort of hawkish shift at the Fed. 2-year US yields are now up more than 6bps on the day to fresh post-pandemic highs above 0.55%.
AUD/USD was showing some signs of life on its way to a high of 0.7273 overnight before reports confirming a second term for Jerome Powell as FOMC Chair spurred the USD. AUD/USD ultimately traded to a low of 0.7225 with further demand expected ahead of 0.7200 while offering interest remains above 0.7300.
Event Risk Data Today
Aust: The RBA’s Head of Domestic Markets is due to speak on ‘securities markets through the pandemic’ at 12:05pm. The RBA’s Deputy Head of Domestic Markets will then participate in a panel on the ‘transition to risk free rates, the future of BBSW’ at 2:50pm.
NZ: A steep decline is anticipated for Q3 real retail sales, with the elevated alert level weighing heavily on spending (f/c: -10.0%).
Eur/UK: The Markit manufacturing and services PMIs for Europe will likely weaken in November due to supply shortages and delta concerns (market f/c: 57.5 and 54.1 respectively). The UK PMIs are also expected to be impacted by Brexit.
US: November’s Markit manufacturing and services PMIs are expected to remain robust despite ongoing supply and delta concerns (market f/c: 59.0 for both). October’s unexpectedly strong lift in the Richmond Fed index points to a positive outlook for the region for November.