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  • The Federal Reserve keeps rates unchanged, dot plot suggests no rate hikes until after 2022.
  • AUD/USD makes a round turn on the statement and decision, prints fresh 2020 high.
  • Markets now wait for the press conference for more insight from Powell.

At the time of writing, the Aussie has made a round trip on the release of the Federal Reserve’s interest rate decision and has rallied to a fresh high for 2020 of 0.7062.

The Fed has left rates on hold, which was as expected. Markets were looking for more concrete guidance on the pace of Treasury buying. 

Ahead of the meeting, the prior statement, in this regard, was as follows:

To support the flow of credit to households and businesses, the Federal Reserve will continue to purchase Treasury securities and agency residential and commercial mortgage-backed securities in the amounts needed to support smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions.

Today’s statement is as follows:

To support the flow of credit to households and businesses, over coming months the Federal Reserve will increase its holdings of Treasury securities and agency residential and commercial mortgage-backed securities at least at the current pace to sustain smooth market functioning, thereby fostering effective transmission of monetary policy to broader financial conditions. In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations. The Committee will closely monitor developments and is prepared to adjust its plans as appropriate.

The stock market likes this guidance and this should continue to support AUD so long as it remains correlated to equity prices. 

The DXY is down 0.58% atthe time of writing and has lost the 96 handle on this dovish statement. 

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AUD remains quite closely correlated with the S&P 500

As mentioned, AUD remains quite closely correlated with the S&P 500. This correlation seems likely to remain broadly intact in coming weeks, especially now that the Fed has greatly committed to a dovish stance. 

However, respective policy settings will also play a role and markets will now wait to see what the Reserve Bank of Australia will do next. 

On March 18 when the RBA announced that it would adopt a bond-buying programme for the first time. However, the fact that it needed to buy so few bonds, markets regarded the RBA as one of the most hawkish central banks in the G10.

At this juncture, we know that the RBA has stated that YCC will remain in place until its goals for full employment and inflation have been achieved.

Looking forward, markets, therefore, expect that policy could be in place for the foreseeable future. It is assumed that yield curve control, or YCC, will be removed before the cash rate is hiked.

Australia’s outperformance in coronavirus containment should play in its favour but the Aussie does seem stretched around recent levels.

analysts at Westpac have argued. 

AUD/USD levels

 

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