USD: FOMC statement sparked a new wave of selling - Westpac

Just when the US dollar was showing glimmers of support, the FOMC statement sparked a new wave of selling as the dollar Index fell to lows since June 2016 (when the Brexit vote saw a flight into USD), notes Sean Callow, Research Analyst at Westpac.

Key Quotes

“The dollar’s fall was backed by lower yields along the curve, with pricing for a rate hike in September falling to zero and the 10 year T-note yield falling 5bp to 2.28%.”

“It is fair however to question whether the Fed statement warranted such a reaction. The steady hand at 1-1.25% was fully expected and there is surely nothing dovish about the Fed planning to start reducing its balance sheet “relatively soon”, compared to “this year” in the previous statement. Perhaps the focus was instead on the removal of the qualifier “somewhat” when noting inflation is running below the 2% target. This is recognition of the 1.4% y/y reading on the core PCE deflator in May, down from 1.8% in Jan-Feb 2017. The June data on Tuesday will be watched with great interest.”

“Turmoil in the Trump administration is surely not helping the dollar’s cause but there may be at least some temporary relief near term. Expectations for US data could now be so low that markets risk being caught out by strong data such as the surge in consumer confidence in July. Q2 GDP on Friday could be key.”

“Inflation was of course Australia’s key data this week and while not as far off target as in the US, it was rather muted, up just 0.2% q/q. Prices of products either imported or sensitive to competition are mostly weak.”

“The report left us comfortable with our long-standing view of the RBA being comfortably on hold. So this is not a real source of AUD gains. Commodities are more helpful, with iron ore back to $70/tonne this week. But AUD strikes us as expensive to fundamentals. If the RBA agrees, we could see jawboning scaled up next week.”