4th May 2022 - AUD volatile after surprise interest rate decision


Market Headlines

The Reserve Bank of Australia has lifted the official cash rate for the first time in more than 11 years in its first intervention in a federal election since John Howard lost office in late 2007.


The central bank lifted its cash rate target from the record low 0.1% it had hovered at since November 2020, during the depths of the Covid pandemic. It was raised more than expected to 0.35%, and the RBA signalled more rises to come.

US stocks were higher Tuesday as factory new orders for March beat expectations and the Federal Reserve began its two-day policy meeting. The Dow Jones Industrial Average climbed 0.2% to 33,128.79, with the S&P 500 up 0.5% to 4,175.48 and the Nasdaq Composite was 0.2% higher at 12,563.76. Energy, financials and real estate led gainers, with all but two sectors, consumer staples and consumer discretionary, in the red. The US 10-year yield dropped 2.1 basis points to 2.98%. West Texas Intermediate crude-oil futures slumped $2.41 to $102.76 per barrel.

The Federal Open Market Committee is expected to raise the federal funds rate by 50 basis points and detail the process for reducing its securities holdings, as suggested by several FOMC officials including Chairman Jerome Powell. The FOMC's statement following Wednesday's meeting is due for release at 2:00 pm ET, with Powell's press conference scheduled for 2:30 pm ET. Wells Fargo Investment Institute recently increased its 2022 year-end target range for the federal funds rate to 2.5%-2.75% from 1.5%-1.75% as its economists concluded the red-hot inflation in the US is likely to be "sticky."

The Federal Reserve's aggressive interest rate hikes and balance sheet cuts over the next 16 months in a bid to tame inflation won't achieve a soft landing and may lead to a recession, according to CNBC's May Fed Survey, which polled economists, fund managers and strategists.

Meanwhile, a more than 2% gain in factory new orders for March, 2.3% increase in factory shipments and stronger job openings were the highlights of US data released on Tuesday. New orders for US factory goods rose by 2.2% in March, above expectations for a 1.2% increase in a survey compiled by Bloomberg and following a 0.1% increase in February. US job openings rose to more than 11.5 million in March, the Bureau of Labor Statistics said. That number beat the 11.2 million expected in a survey compiled by Bloomberg and was up from about 11.3 million reported in February.

Currencies

AUD/USD pair retreated below 0.7100 after the RBA pushed the pair towards 0.7147. The 25 bps rate hike by the Australian central bank will likely be overshadowed by a much more aggressive US Federal Reserve. Expect volatility overnight as we await the Federal Reserve interest rate decision.


USD/JPY is treading water above 130.00, fluctuating between gains and losses, as markets remain indecisive ahead of the critical Fed interest rate decision. Although the Treasury yields hovering near three-year highs is lending support to the spot while the upside remains capped by the US dollar weakness. The Fed is on track to hike the interest rates by 50 bps at its May meeting. Meanwhile, the BOJ came out ultra-dovish last week, widening the monetary policy divergence and the underpinning currency pair.


EUR/USD pair found some temporal demand on Tuesday, surging early in the US session to a daily high of 1.577. The greenback recovered ahead of Wall Street’s close, helped by upbeat US data, with the pair currently trading in the 1.0520 price zone. Market players have temporarily put aside growth-related concerns and shifted their focus to central banks’ announcements. The Reserve Bank of Australia disclosed its decision to hike rates by 25 bps early on Tuesday, more than the general agreement of 15 bps. The US Federal Reserve and the Bank of England will have monetary policy meetings later in the week, and both are expected to be more aggressive and hike by 50 bps.


GBP/USD has lost its recovery momentum in the American session and erased most of its daily gains. Upbeat US data and caution ahead of central bank’s announcements limit intraday ranges across the board.


Currency ranges over the last 24 hours





Market Outlook

The Federal Reserve and Bank of England this week are expected to take fresh steps to curb inflation that is running at multidecade highs, while U.S. employment data is forecast to show another strong month for the Labour market.

Wednesday

After a slight narrowing in February, the U.S. trade deficit in goods and services likely widened to a record in March as American businesses and consumers slaked their demand for capital goods, cars, computers, food and other products by purchasing them from overseas.

Federal Reserve officials are poised to raise the benchmark interest rate by half a percentage point and approve plans to start shrinking the central bank's $9 trillion asset portfolio. The moves are part of a double-barrelled effort to slow the economy and ease inflation, running at a four-decade high.

Thursday

The Bank of England is expected to announce its fourth rate increase in as many meetings of its policy-making body as inflation rises to levels last seen three decades ago. But with surveys pointing to a slowdown in consumer spending as recent tax increases squeeze household incomes, policy makers might signal that they don't intend to go much further.

Friday

U.S. employers added an average of 562,000 jobs a month in the first three months of the year, a historically solid pace that has brought employment nearer its prepandemic level, pushed the unemployment rate toward a 50-year low and driven wages higher. The Labor Department’s employment report for April is expected to show another strong month for job gains. Economists will be watching for signs that more people are joining the workforce, potentially easing wage pressures.

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Disclaimer

This material is provided by Navigate Global Payments (Navigate) ACN 615 699 888, AFSL 502711.  The material contains general commentary only and does not constitute investment or any other advice.  Certain types of transactions, like futures, options and high yield securities can be risky, and not suitable for all investors.  This information has been prepared without considering your objectives, financial situation or needs.  Please seek your own independent legal or financial advice before proceeding with any investment decision.  The information is believed to be accurate at the time of compilation and is provided in good faith.  Navigate does not warrant the accuracy or completeness of any information contributed by a third party. The information is subject to change without notice and Navigate is under no obligation to update the information. The information contained in this material are opinions of the author at the time of writing and does not constitute an offer, recommendation to act, a solicitation of an offer, or an inducement to subscribe for, purchase or sell any financial instrument or to enter a legally binding contract.  This information, including any assumptions and conclusions is not intended to be a comprehensive statement of relevant practise or law that is often complex and can change.  Past performance is not a reliable indicator of future performance. Any forecasts given in this material are predictive in character.Navigate Global Payments Pty Ltd nor its related parties or officers accepts no liability whatsoever for any loss or damages suffered through any act or omission taken as a result of reading or interpreting any of the information contained or related to this site.