AUD/USD: bullish on Powell's surprise dovishness, PBoC and U.S. yield curve weighing on long dollar
- AUD/USD had been as high as 0.7344 on Friday on the back of further weakness in the greenback as Powell came across more dovish at the Jackson Hole.
- There was also an announcement from the PBoC that banks would resume a counter-cyclical factor when calculating the daily reference rate and that sparked further paring back of long dollar positions.
Copper also rose to the highest levels since the 14th August, but markets will be watching the trade dispute dragging on which should cap gains. Also, with the Aussie acting as a proxy, China signalled their intention to prop up the nation's stocks and currency which is another tick on the checklist for bullish Aussie.
The Fed Chair’s reiteration that rate rises would remain gradual gave the green light to ongoing falls in the USD and increases in equities on Friday. AUD/USD started out in a consolidation around 0.7280 and of the prior day's correction of the mid-week-sell off down to 0.7237 the low. The traffic was all one way as the London session started to draw to a Bank Holiday weekend close and when North America and the sound bites from the Jackson Hole headlines started to take over - the key of which came with Powell saying that he sees no risk of the economy overheating and implied that a flattening yield curve holds a meaningful message. The market now expects that the Fed Funds will top out at around 2.75% despite the economic momentum. The underbelly of an unsustainable federal budget deficit, adverse demographics and low productivity pose structural challenges.
A hawkish part of Powell’s speech was overlooked:
However, analysts at Nordea argued that a hawkish part of Powell’s speech was overlooked:
"The Fed Chair’s comment on excesses echoed recent remarks by BIS’ Borio: “in the run-up to the past two recessions, destabilizing excesses appeared mainly in financial markets rather than in inflation. Thus, risk management suggests looking beyond inflation for signs of excesses”.Back in 2012-2013 the credit cycle and financial excesses were widely discussed among central bankers, but as dollar soared and oil prices collapsed in 2014 all such concerns were put away as central banks instead decided to fight deflation risks. That Fed Powell included this reasoning might represent a slight hawkish shift within the Fed, as it suggests the Fed can keep hiking rates (to rinse away, or prevent excesses), even in a scenario where inflation disappoints."
However, for the meantime, it does appear that the market is starting to fall out of love for the greenback and it has been stripped of its recent safe-haven status title. If metals can stay stronger on the prospect for a turnaround in China, that should fuel further upside in AUD/USD as well. Equally, if focus stays with the US yield curve, where the recent flattening pace persists, the 10y/2y curve will have inverted by early next year - ("With the yield curve often used as a recession indicator, the market’s attention should be of no surprise," the analysts at Nordea warned) - and that will spell danger to the greenback's longs.
AUD/USD levels
"In the daily chart, it stalled its latest recovery around a bearish 20 DMA, also below the 50.0% retracement of its August decline, while technical indicators recovered from near oversold readings, but remain well into negative territory. In the 4 hours chart, the pair finished around its 20 and 100 SMA, both maintaining downward slopes, while technical indicators turned horizontal within neutral levels, suggesting that buying interest remains limited."
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