FX Update: RBA hike warms up for FOMC main act tomorrow.

FX Trading focus: RBA impresses with tightening move ahead of FOMC main event

There were quite a range of expectations among those surveyed on the RBA’s likely decision ahead of last night’s meeting, with a minority looking for nothing, most expecting a 15-basis point move to get the rate to an even 0.25% and others looking for 40 basis points to take the rate to 0.50%. Instead, we got a 0.25% hike to take the rate to an awkward 0.35%. The bank also announced that it would not replace maturing assets on its balance sheet (very few of which are expiring this year). In its commentary on the economy, the statement noted the important “there is evidence that labour costs are increasing more quickly” in addition to inflation levels picking up more aggressively. The guidance was for more rate hikes to come and 2-year Australia rates are nearly a full 25 basis points higher than they were yesterday, a chunky move. AUD rallied sharply, taking AUDUSD about a figure higher overnight as AU-US 2-year yield spreads jolted higher and are now close to parity. And yet the move held poorly, showing how firm the USD remains. AUDNZD was another matter, as that pair rocketed will clear of 1.1000 and testing its highs from 2018 – next focus there could be the highest since 2013 of 1.1430.

Elsewhere, the US 10-year Treasury yield tested 3.00% for the first time since late 2018 but retreated slightly this morning, and USDJPY has gotten sticky around the 130.00 level. As I emphasized yesterday, the reaction to the FOMC meeting will be important for JPY crosses in particular if long US yields consolidate lower after their blistering run higher in recent weeks. That could happen even if the Fed surprises with a larger than expected rate (Dear Jay Powell and company: please just hike to 1.00% and stop the upper- and lower-bound nonsense that has outlived its usefulness….) Front loading the hawkishness could actual temper longer yields if the market finally decides that the Fed is bent on getting ahead of the curve.

Chart: EURUSD
Ahead of the FOMC meeting tomorrow night, it is worth zooming out to a weekly chart for the EURUSD and consider where the pair may be headed as it works through the last shreds of the almost 20-year low from early 2017 just below 1.0350. The momentum is vicious and it is hard to see what would turn it back outside of a dramatic end to the war in Ukraine and a collapse of natural gas prices in Europe. On the USD side of the equation, given that the Fed simply cannot allow itself to surprise on the dovish side until at least a couple of solidly lower CPI prints have been registered, together with some markedly weaker economic data, the market would have to stage an enormous “sell the fact” reaction to the FOMC meeting tomorrow to see the USD lower. This pair may be ready to test parity in short order at its current pace of descent. Only a full reversal of the last sell-off wave, a rise above about 1.0750-1.0800 would suggest.