28th April 2021 - AUD Pressured below 0.7800 on cautious sentiment ahead of Australia Q1 CPI, FOMC

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Market Headlines

Equities traded lifeless, with most major indexes ending the day around their opening levels. Government bond yields advanced, with the US 10-year Treasury note settling at 1.61%. In the coronavirus front, the differences between major economies and developing countries have widened. The US CDC has said that fully vaccinated people can go outdoors without masks, except in crowded settings. The UK also progresses into reopening the economy as over 50% of the population has received at least one shot of a coronavirus vaccine.

India, on the other hand, continues to record cases of over 350K per days, while the situation in South America continues to deteriorate amid delayed vaccination. The immunization campaign in Europe is also lagging, but most hope to regularize the situation in the next couple of months.

Commodities, Brent crude oil futures rose 1.3% to $66.55, copper rose 1.00% to a fresh ten-year high, and gold fell 0.3%, while iron ore rose 1.1% to $193.65 – an 11-year high.

Overnight Currency Ranges

AUD/USD 0.7762 0.7803

EUR/USD 1.2058 1.2093

GBP/USD 1.3859 1.3924

USD/JPY 108.09 108.74

NZD/USD 0.7202 0.7236

USD/CAD 1.2389 1.24185

USD/CNH 6.4708 6.4860

AUD/JPY 84.09 84.46

AUD/NZD 1.0769 1.0791

AUD Thoughts

AUD/USD: Pressured below 0.7800 on cautious sentiment ahead of Australia Q1 CPI, FOMC

Market expectations is that the Fed will remain unchanged, reiterate the need for patience, and to highlight that they will look through any near-term temporary inflation increases, and won’t hike until we see sustained strength in actual data. They may also lift the interest rate on excess reserves (IOER). While technical and operational, the risk is that it is misinterpreted by the market, potentially adding to FX volatility.

The Pre-FOMC mood isn’t the only catalysts that contribute to the AUD/USD weakness but hopes of a positive surprise from the Aussie Consumer Price Index (CPI) for the first quarter (Q1), expected 1.4% versus 0.9% prior, despite local lockdowns, also weigh on the quote.

Further, the latest US Census data backed the Republicans’ hopes to regain the power in the Senate, which in turn will blur President Biden’s tax hike proposals and weigh on the mood. It should be noted that India’s worrisome covid figures, above 300K during the last six days, join the imbalance in the global vaccinations to test the market optimists.

Against this backdrop, Wall Street benchmarks were mostly unchanged while the US 10-year Treasury yield rose 5.5 basis points (bps) to 1.62% by the end of Tuesday’s North American session.

While AUD/USD prices seem to pave the way for a nearby consolidation of losses on upbeat Aussie CPI, the rush to risk-safety and cautious mood may compress the quote’s immediate moves ahead of the key FOMC. AUD/USD remained in a tight 0.7762/0.7803 range overnight so all order books remain intact. Demand is expected ahead of 0.7740 while offering interest should thicken as we approach 0.7820.

Event Risk Data Today

Australia: Q1 CPI (market median is 0.9%) which will lift the annual rate to 1.4%yr. The trimmed mean is forecast to rise 0.6%qtr which will see the annual rate lift from 1.2%yr to 1.4%yr. The six-month annualised pace of the trimmed mean is forecast to lift from 1.5%yr to 2.2%yr moving up through the bottom of the RBA’s target band. The weighted median is forecast to rise 0.6%qtr with the annual pace holding at 1.4%yr. Government assistance has had a big impact on the CPI and for the next few quarters the unwinding of those packages is set to boost the CPI. ABS Weekly Payroll Jobs and Wages for the week ended April 10. As the first payrolls update in the post-JobKeeper period, the release will be closely watched.

US: Wholesale inventories are expected to expand 0.5% in March and will continue to support growth over 2021. Following this, the FOMC meeting statement is unlikely to change materially in April from March given that the recovery and risks are broadly as they were. Market participants will focus instead on the post-meeting press conference of Chair Powell, in particular his view of the progress necessary for a tapering of asset purchases to be considered. Market sentiment is that a potential change of policy is a long way off, let alone acting on it, with the FOMC keen to maximise the return from this recovery. Given the US' current momentum; the path of policy; and remaining risks, the taper is most likely to occur in the second half of 2022, with federal fund rate hikes to come well after that.

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