FX Update: RBA punishes AUD. Fed Chair Powell testimony on tap. FX Update: RBA punishes AUD. Fed Chair Powell testimony on tap. FX Update: RBA punishes AUD. Fed Chair Powell testimony on tap.

FX Update: RBA punishes AUD. Fed Chair Powell testimony on tap.

Forex
John J. Hardy

Chief Macro Strategist

Summary:  The RBA’s dovish stripes on display as the new statement released overnight clearly suggests the central bank is looking for an excuse to pause its tightening regime at the next meeting. Many pockets in FX lack conviction as we await key incoming risk events, and Fed Chair Powell’s two days of semi-annual testimony starting today may not even loom particularly large, with the Friday Bank of Japan meeting and US jobs report and next Tuesday’s US CPI release the next three event risks of note.


Today's Saxo Market Call podcast
Today's Global Market Quick Take: Europe from the Saxo Strategy Team

FX Trading focus: RBA punishes the Aussie with its dovish hike. Remarkable spread of ECB vs. RBA expectations.  Fed Chair Powell testimony may not offer much.

The RBA hiked 25 bps overnight as widely expected, taking the cash rate target to 3.6%. The market read the statement as dovish on a small change of phrase In the guidance on further tightening, with February’s “In assessing how much further interest rates need to increase”, changed in today’s statement to “In assessing when and how much further interest rates need to increase”. The insertion of “when” is a tip-off that the RBA is looking for excuses to pause its tightening regime at one or more meetings to assess developments. Australia’s 2-year yield dropped some 14 basis points as the RBA is priced to reach a terminal rate now only about 40 basis points higher, near 4.00%. While the RBA is concerned that services inflation remains too high, it is clearly very concerned as well on the risks to the economy from the lagged impact of prior tightening already in the bag, particularly for households with adjustable rate mortgages. Some 800,000 mortgages taken out during the pandemic are due for a reset this year, with massive upward adjustments for payments as the mortgages roll to a new rate that is more than twice as high as those during the pandemic. An article from news.com.au suggests that the average Australian mortgage is AUD 600k, equating to a rise of about AUD 16,500 in interest costs over 12 months at the new rate.

But is the RBA at risk of a policy mistake? Time will tell, but it is certainly notable that the central banks trying to come in for a pause, including the Bank of Canada, risk another embarrassing pivot if inflation proves more persistent than expected, as is our base case. Also notable is that the ECB and the RBA terminal rate expectations are nearing parity at 4.00%! Who would have thought this was possible in any of the prior cycles of the last 20 years?

As noted in this morning’s Saxo Market Call podcast, the ECB is priced to do more than 150 basis points of further tightening, the most additional tightening in the coming two quarters of any DM central bank. That is beginning to look a bit stretched in relative terms. Of course, we must also recall how late cycle the ECB has been in past cycles relative to other central banks. Remember the actions of one of the most out-of-touch central bankers of the modern era. Jean Claude Trichet, who hike two months before Lehman Brothers’ collapse and again in the midst of the EU sovereign debt crisis in 2011.  

Chart: AUDUSD
New lows for AUDUSD here locally after the dovish RBA move, which pushes the focus lower to the next target, the 61.8% retracement of the rally from the lows, which comes in near 0.6550. Ironic to see one of the historically favoured commodity proxies struggling for air at a time when we are supposed to be celebrating a new rebound in Chinese growth, which has only shown up in fits and starts in metals markets. AUD is more in the grips of the RBA’s foot-dragging on tightening. RBA Governor Lowe will speak tonight and may try to pushback against the aggressive market takeaway if he wants to insist on two-way potential from here for the RBA’s next actions.

Source: Saxo Group

Fed Chair Powell is out testifying today and tomorrow before Senate and House Panels, respectively. Much of the time will be eaten up by painfully boring political posturing from the Congressional members on the panel, but Powell will no doubt try to sound as chipper and confident as possible, emphasizing the hope that inflation has rounded the corner, but that the Fed will remain vigilant. I don’t see him needing to send a strongly hawkish message to his audience – the US Congress. Looming larger for the US dollar are the US jobs report this Friday and especially the CPI report next Tuesday after the re-acceleration in the January data.

Bank of Japan drama is set to continue both through Friday’s swan song from Governor Kuroda and as incoming Kazuo Ueda finds his feet. The “big reset” of the JPY higher, in my view is only likely on a combination of yields easing elsewhere simultaneously with a tardy Bank of Japan extraction from yield-curve control and shifting out of NIRP for the policy rate. As long as yields are on an upward trajectory elsewhere, the JPY may only reset modestly firmer if YCC is ended or the cap significantly loosened, if we are to take Ueda at his cautious word. Still, ‘tis the season of volatility potential for the JPY, not only on the BoJ leadership handover, but also on the Japanese financial year drawing to a close.

Table: FX Board of G10 and CNH trend evolution and strength.
The strong euro edging out the US dollar as strongest currency here, not a huge surprise given the rise in ECB expectations, while risk sentiment has staged a rebound. The Aussie is the clear loser for now.

Source: Bloomberg and Saxo Group

Table: FX Board Trend Scoreboard for individual pairs.
Most of the flip-flopping here is in the obscure crosses, but note EURUSD on the cusp of trying to turn higher if it closes above 1.0700. Also, EURSEK has flipped to the upside as well, even if it remains in the shadow of the dive from above 11.40.

Source: Bloomberg and Saxo Group

Upcoming Economic Calendar Highlights

  • 1500 – US Fed Chair Powell before Senate Banking Panel
  • 1730 – Switzerland SNB President Jordan to speak
  • 1800 – US Treasury to sell 3-year Notes
  • 2155 – Australia RBA’s Lowe to speak

Quarterly Outlook 2024 Q3

Sandcastle economics

01 / 05

  • Macro: Sandcastle economics

    Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.

    Read article
  • Bonds: What to do until inflation stabilises

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.

    Read article
  • Equities: Are we blowing bubbles again

    Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.

    Read article
  • FX: Risk-on currencies to surge against havens

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.

    Read article
  • Commodities: Energy and grains in focus as metals pause

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.

    Read article

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)


Business Hills Park – Building 4,
4th Floor, office 401, Dubai Hills Estate, P.O. Box 33641, Dubai, UAE

Contact Saxo

Select region

UAE
UAE

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

Saxo Bank A/S is licensed by the Danish Financial Supervisory Authority and operates in the UAE under a representative office license issued by the Central bank of the UAE.

The content and material made available on this website and the linked sites are provided by Saxo Bank A/S. It is the sole responsibility of the recipient to ascertain the terms of and comply with any local laws or regulation to which they are subject.

The UAE Representative Office of Saxo Bank A/S markets the Saxo Bank A/S trading platform and the products offered by Saxo Bank A/S.