US Fed Expected to Hike by 50bps Tonight
AUD
The Australian dollar has experienced a tumultuous 24 hours off the back of the historic decision by the RBA yesterday to increase the Interest rate to 0.35%, the AUD managing to open higher across all its trading pairs this morning. To recap, Australia’s central bank lifted the cash rate from a record low 0.1 per cent to 0.35 per cent, which is the second time rates have risen during an election; the other being John Howard’s unsuccessful bid in 2007. This also marks the first time in over ten years in which the Interest Rate has been increased since 2010. Although a rate increase had been on the agenda for some months, very few would have predicted the heavy front loading yesterday. Governor Lowe chose not to wait for wages data and noted that inflation had picked up “significantly and by more than expected”. The Bank’s year-ended underlying inflation forecast has been lifted to 4¾% over 2022 (previously 2¾%) and 3% by mid-2024 (previously 2¾%). The forecast for this year implies an expectation that quarterly underlying inflation averages more than 1% each quarter. The Bank also lowered its Unemployment Rate forecast to 3½% by early 2023 (from a low of 3¾% previously). These significant revisions in Inflation and Unemployment may have played part in the Bank taking such an aggressive approach in hiking rates yesterday. Governor Lowe left also the door open to larger increases in the cash rate by stating that “the Board will continue to closely monitor the incoming information and evolving balance of risks as it determines the timing and extent of future interest rate increases”. In equities, the ASX 200 closing down 0.4% as one would expect with the rate hike, the Hang Seng flat, with Japan and China on holiday. The Shanghai Comp was the Star performer closing up 2.4%. Commodities were also mixed with Iron Ore & Copper closing -1.7% & up 0.4% respectively. Looking ahead we have local Retail Sales figures this morning, before tonight's big Fed Reserve decision from 'The States (see below).
USD
AUSUSD has experienced significant volatility off the back of the RBA decision yesterday, trading within a 100 pip range and opening higher at 0.7096 this morning. AUD was stronger leading into the decision and then jumped 60pips on the announcement of the hike, before settling mid-range. US Equities were performing well with S&P 500 & Dow Jones closing up 0.2% & 0.5% respectively. Looking ahead and we have a massive night of US data to look forward to, starting with ADP Non-Farm Employment data. This will be followed by the main event - the Fed Reserve's interest rate decision. A 50bp hike by the FOMC is fully priced in, as has been well-telegraphed by Chair Powell and major Fed speakers as is the protocol by Fed Bankers across to the world in an effort to bring a sense of predictability and calm to markets. There appears to be limited room for a surprise bullish tilt this evening, considering 50bps is already expected, a hike of anything less should see USD weaken.
EUR
AUDEUR saw itself rocket off the 67c handle yesterday morning and the afternoon RBA data only launched it another 50pips before the pair started to be sold off throughout the night & opening at 0.6746 this morning. There was a slew of data out of Europe and although it was mixed, the immense buying of AUD in the early session allowed even the most modest of data to begin a selloff. Eurozone PPI m/m for March was 5.3% higher than an expected at 5.0%. German April unemployed fell by 13,000 beating expectations of -15,000. Eurozone monthly Unemployment Rate also matched expectations of 6.8%. Looking ahead we have Spanish Employment Change followed by Services PMI data from the major Eurozone economies, however the Fed Reserve will be the focus (see above).
GBP
AUDGBP traded higher yesterday, reaching highs just shy of 5pips from 57c before settling slightly lower at 0.5681 this morning. Although RBA data was the main driver, UK data showed April’s final Manufacturing PMI coming in at 55.8, up from a preliminary reading of 55.3, showing UK manufacturers hiked prices at the fastest rate on record. UK Equities were relatively subdued and had little reaction with the FTSE closing up 0.2%. Tonight there is some low-level data sprinkled on which will include M4, Money Supply, Mortgage Approval & Net Lending Figures for the month, ahead of tomorrow night's Bank of England interest rate decision.
NZD
AUDNZD saw +100pip gain yesterday and briefly held at 1.1060 in the afternoon before drifting back to 1.1034 this morning. Aside from the RBA there was little in the way of local Kiwi Data. However, this morning saw the release of NZ Employment Data with the Unemployment Rate holding firm with expectations of 3.2%. Quarterly Employment Changes saw no change and also printed in line with expectations of 0.1%. As of writing there is no marked impact on the pair from the data however they will be an important catalyst for RBNZ in determining their Interest Rate policy next month.