FX Update: USD dumps as market shrugs off FOMC hawkish cut attempt

A curious FOMC meeting yesterday, as the statement and the Powell press conference were objectively a “hawkish cut”, in that the Fed is reluctant to signal any further easing for now unless incoming data clearly points to a slowdown. It was surprising in the press conference to see how much faith Chair Powell is putting in the prospects for a “phase one” US-China trade deal and in hopes that the Brexit situation will resolve itself. One wonders if Powell and company have their eye on bulled-up equity markets and simply wanted to bring everything they could to the table to argue against any further signaling on easing – fearing asset market destabilization via a melt-up scenario.

In reaction to the press conference as it unfolded, the USD tried to put in a rally as it was clear that Powell wanted to guide for a hold now on the policy rate, even if this was hinging on incoming data, but judging from the action in futures pricing in Fed probabilities for coming Fed meetings, there was no conclusion drawn or notable shift in the odds for policy moves at coming meetings (market leaning on no further cuts and not getting to 50/50 odds of another cut until around March next year) Interestingly, even as long US yields fell yesterday, the strength in the bond market was not a safe haven bid, and equities put in a very strong session, with the market closing at a new all-time high. The US dollar was heavily lower, particularly against smaller currencies. Now the interest will be in how the market treats incoming US data – especially weak data and whether this is seen as cause for concern on risk sentiment (more favouring USD lower versus, for example, the JPY) or if the implications for further Fed easing are instead celebrated.

US Secretary of Treasury Mnuchin said yesterday that the US is looking into issuing 20- and 50-year bonds for the first time.

The Canadian dollar not participating in the celebration of US dollar weakness as the Bank of Canada statement yesterday offered up a much more cautious tone and fretted that the Canada’s economic resilience could be sorely tested in the months ahead and cut its growth outlook for 2020. Governor Poloz indicated that a rate cut was considered at the meeting, but rejected. CAD crosses were absolutely shredded as the market was caught offside – have a look at NZDCAD , for example, suggesting that there was a stale and extended positioning in CAD that didn’t appreciate the surprise. Canadian short rates were marked down sharply as the market priced in higher odds of a cut at one of the coming meetings.

The BoJ overnight was hardly noticed, as the Bank kept policy unchanged and merely removed specific guidance on the timing of its current policy mix (from 2020 to “as long as necessary”).

Chart: AUDUSD
AUDUSD exploded up through resistance in the wake of the FOMC meeting and is now testing the massive descending channel that has defined the price action since well back into 2018. Achieving a move through 0.7000 begins to break the chart formation and suggests higher levels still, even if we don’t believe Australia has faced its worst risks for the cycle. We’re open minded for the risk of a decent rally here on USD weakness, but not ready to get enthusiastic on the longer term prospects for the Aussie.