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  • AUD/USD drops over 0.30% on the knee jerk following the Fed’s  interest rate decision.
  • Fed cuts interest rate decision to cut 0.25% and not as dovish statement as market had been priced for.  

AUD/USD has dropped significantly by over 0.30% on  the back of the Federal Reserve interest rate decision to cut 0.25% on muted inflation pressures and overseas risks while uncertainties remain, ending the balance-sheet  drawdown August first. There were two decenters, (as expected), who  preferred to maintain the target rate where it was.   AUD/USD dropped to a fresh low for the day to  0.6860. The DXY has rallied to the highest levels since May 2017, which is going to hurt the no yielders such as the euro of which would be beneficial to commodity currencies and crosses vs the euro in the long-run once the dust has settled. All in all, this is not as dovish as the market had been priced and the Dollar can stay stronger for longer.  

Federal Reserve outcome

  • The interest rate on excess reserves cut to 2.10% from 2.35%.
  • FOMC cuts benchmark rate by 25 basis points (bps); target range stands at 2.00% – 2.25%.
  • To conclude b/sheet reduction in august, 2-months earlier than previously indicated.
  • To roll over at auction all principal payments from holdings of treasury  securities, reinvest all principal payments from agency debt and agency MBS received each month.
  • Principal payments from agency debt and agency mortgage-backed securities  (MBS) up to $20 bln/month will be reinvested in treasury  securities to roughly match maturity composition of outstanding Treasury  securities.
  • Principal payments from agency debt and agency mortgage-backed securities in excess of $20 bln will continue to be reinvested in mortgage-backed securities.
  • Rate cut supports the committee’s view that sustained economic expansion, strong labour market and  near-target inflation. are most likely outcomes but uncertainties remain.
  • As it contemplates future path of fed funds rate it will continue to monitor incoming info, act as appropriate to sustain expansion.
  • Household spending growth has picked up, but business fixed investment growth has been soft and inflation compensation measures remain low.

Statement comparison  

What changed between the June 19 statement and the July 31 statement – (It’s  pretty much identical to last  and this is not giving the dovish signals the market had been priced for – hence we can expect a stronger dollar for longer).

The RBA may have found some solace of late

The recent  CPI print for Australia gave some relief to the Aussie this week with a print of    0.6% in the June quarter compared to the market median  forecast for 0.5%. The annual rate lifted to 1.6% YoY  from 1.3%YoY.  The average of the core measures, which are seasonally adjusted and exclude extreme moves, rose 0.4%QoQ/1.4%YoY. In the quarter, the trimmed mean gained 0.42% while the weighted median lifted 0.37%. “For the  RBA, today’s number provides some flexibility in terms of the timing of the next rate cut; and a move next week now seems materially less than a 50% probability,” analysts at ANZ Bank argued. This makes AUD/NZD an attractive bid.  

AUD/USD  levels

More to come…