US equities largely preserved early gains following the Fed’s policy decision, the S&P500 up 1.0%. Short maturity bond yields and the US dollar rose slightly in response to the statement, which indicated rate hikes could start late 2022. Indications of a tapering announcement at the next meeting were as expected.
The FOMC said "moderation in the pace of asset purchases may soon be warranted" if the economy continues to make the progress toward the dual goals, signalling an announcement at the November meeting – largely as markets had expected. Chair Powell, in his press conference, said any such tapering would likely conclude around mid-2022. The statement noted the economy and employment have "continued to strengthen," though the pandemic has slowed the recovery. The statement also noted "Inflation is elevated, largely reflecting transitory factors." The dot plot projection for the Fed funds rate rose slightly for 2022, from a 0.125% median to 0.25%, while 2023 was increased from 0.625% to 1.0% - the latter a moderate surprise for markets.
US 2yr treasury yields rose from 0.22% to 0.24% in response to the Fed, while the 10yr yield ranged between 1.29% and 1.34%, currently 3bp lower on the day at 1.30%.
Commodities, Brent crude oil futures rose 2.1% to $76, copper rose 2.4%, gold fell 0.4%, and iron ore rose 16.0% to $105 (as China’s markets reopened).
Overnight Currency Range
AUD/USD 0.7224 0.7296
EUR/USD 1.1684 1.1756
GBP/USD 1.3609 1.3688
USD/JPY 109.12 109.90
NZD/USD 0.6993 0.7055
USD/CAD 1.2699 1.2827
USD/CNH 6.4545 6.4884
AUD/JPY 78.79 79.94
AUD/NZD 1.0311 1.0343
AUD/USD is a touch higher as we approach the open of the Asian session for Thursday. AUD/USD, at 0.7240, is 0.11% higher on the day as the Evergrande risk fades while the Federal Reserve moves back to the fore.
The outcome of Wednesday's two-day Federal Open Market Committee meeting was hawkish. However, risk assets initially rallied on the statement, potentially owing to the signs that the corporate debt problem in China will be contained and isolated to China. Still, the surprise moves in asset classes were unusual and took a while to correct before the US dollar could shine through the fog.
In a 65 pip round trip, AUD/USD initially rallied through a 50% mean reversion target on the daily charts before settling back to where it was before the FOMC statement was released and towards the prior days close down at 0.7232.
The takeaways were that the Fed could announce a taper as soon as the next meeting, without much reliance on more improvements in the jobs market. Powell said there was no need for a blockbuster Nonfarm Payrolls next time around. This gave the greenback a huge and much-needed lift and sank AID/USD. Moreover, the Fed is now predicting rate rises to come sooner than first anticipated as per the dots.
''Half of Fed policymakers see lift-off in fed funds rate from zero in 2022, vs. 7 of 18 in June forecast; all but one see lift off by end-2023 (vs. 13 in June)."
Evergrande contagion risks fade
Soon after the Chinese central bank injected cash into the banking system, temporarily soothing fears of imminent contagion from the debt-laden property developer, Evergrande, it was announced it had agreed to settle interest payments on a domestic bond on Wednesday.
Additionally, Fed's Powell says China's corporate debt problem can draw no parallels to the US and he feels that it is an isolated problem for China and that there is no direct exposure to the US.
US jobs eyed
All eyes will be back on data now to determine when the Fed will indeed start to taper and move towards lift-off in rates. As the virus risk gradually fades, FOMC participants expect the labour market will continue to improve, with unemployment set to fall to 3.5% in 2024, versus 5.2% previously.
All up, the Fed’s projections show an economy that is undergoing a robust economic recovery that will justify a gradual normalisation in policy rates.
AUD/USD technical analysis
The 50% mean reversion target was met during the Fed event and now the focus is back on the downside. However, some consolidation would be expected to play out which spells sideways markets into the end of the week.
AUD/USD traded in a 0.72245/0.7296 range yesterday with support still ahead of the recent lows of 0.7220 while offering interest remains above 0.7300
Event Risk Data Today
Australia: Weekly payrolls for the week ended 28 August will provide an interim update on the ongoing effects of the pandemic on labour.
Euro Area: The September manufacturing PMI should remain firm on robust demand and supply chain frictions (market f/c: 60.3). The September services PMI is expected to be supported by the re-opening of the Euro region (market f/c: 58.5).
UK: The September manufacturing PMI continues to point to robust growth, whilst the September services PMI should reflect delta risks for services. Further, the BoE policy decision and discussions are likely to highlight a promising outlook whilst acknowledging downside risks near term (market f/c: 0.1%).
US: The August Chicago Fed activity Index will provide a timely update on activity for the region. Initial jobless claims for the week ended Sept 18 should show the downtrend slowing (market f/c: 320k). The September manufacturing and services PMIs are also likely to remain in good health. The August leading index is also due (market f/c: 0.7%).