31st August 2019 - UD/USD drops 0.40% on Fed one-and-done cut

Good Morning,

Market Headlines

- The Fed cut its policy rate by 25bp to a 2.0%-2.25% band and left the door open for more, but described this as an insurance cut rather than the beginning of a easing cycle. That disappointed markets which were positioned for a more dovish outcome, pushing US interest rates and the US dollar higher and US equities lower (S&P500 -1.1%).

- US 2yr treasury yields jumped from 1.81% to 1.96% in response to the Fed outcome, steadying around 1.88%. The 10yr yield, which had earlier declined from 2.06% to 2.02% after some lukewarm data, jumped to 2.07% in response to the Fed, but is currently back at 2.00%. Markets are pricing 15bp of easing (or a 60% chance of a 25bp cut) at the 19 September meeting, and a terminal rate of 1.45% (implying 70bp further easing expected in total).

- Australian 3yr government bond yields were volatile, fluctuating between 0.76% and 0.81% but little changed overall at 0.79%. The 10yr yield has slipped from 1.21% to 1.18% - a record low.

- Brent crude oil fell 0.8% to $64.20, iron ore down 1.3% to $118.25.


- The US dollar index is up 0.5% on the day, at the highest level since May 2017.

- EUR fell from 1.1160 to 1.1065 – a two-year low.

- USD/JPY rose from 108.50 to 109.00 – a two-month high.

- AUD fell from 0.6900 to 0.6832 – matching the 18 June low.

- NZD fell from 0.6610 to 0.6543 – a six-week low.

- AUD/NZD mostly sustained yesterday’s gains, inspired by weak NZ business confidence data and solid AU CPI data, trading around 1.0440.

AUD Thoughts

AUD/USD drops over 0.30% on the knee jerk following the Fed's interest rate decision.

Fed cuts interest rate decision to cut 0.25% and not as dovish statement as market had been priced for.

AUD/USD has dropped significantly by over 0.30% on the back of the Federal Reserve interest rate decision to cut 0.25% on muted inflation pressures and overseas risks while uncertainties remain, ending the balance-sheet drawdown August first. There were two decenters, (as expected), who preferred to maintain the target rate where it was. AUD/USD dropped to a fresh low for the day to 0.6860. The DXY has rallied to the highest levels since May 2017, which is going to hurt the no yielders such as the euro of which would be beneficial to commodity currencies and crosses vs the euro in the long-run once the dust has settled. All in all, this is not as dovish as the market had been priced and the Dollar can stay stronger for longer.

AUD/USD dropped over 0.80%, a further 0.40% since the knee jerk sell-off while Powell speaks in session with the press. The market has dropped to the June lows, despite Powell saying that this is not the beginning of a long series of rate cuts. The downside is likely done at this stage, albeit, a clear-out of stale stops could be in the making slightly below here ahead of the Nonfarm Payrolls and RBA next week. The 23.6% Fibo is in the 0.6890s while a downside 127.2% Fibo extension coms in the 0.6760s.

Event Risk Data Today

- Australia: Jul CoreLogic home value index is expected to be flat with the housing market looking to have stabilised around mid-year. Q2 trade prices are anticipated to show import prices up 1.8% and export prices up 2.8%

- China: Jul Caixin manufacturing PMI is released following yesterday’s NBS results.

- UK: The BOE policy meeting is expected to be on hold. The Bank has held onto a mild tightening bias conditioned on an orderly Brexit. Language may be adjusted given the likelihood of a no-deal departure has increased. Also of interest will be updates to the forecasts in the quarterly Inflation Report.

- US: Jul ISM manufacturing is expected to edge up to 52.0 from 51.7, while the final Markit read is likely to be confirmed at the flash estimate of 50.0.

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