Dovish Fed rockets Australian dollar

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DXY fell, EUR and CNY jumped last night:

AUD was up against DXY but nobody else:

Gold was muted:

Oil is rising as a threat to everything:

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Base metals rallied:

Miners were soft:

EM stocks too:

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Junk partied:

Treasuries too:

The bund curve is still flattening:

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Stocks also struggled:

Westpac has the wrap:

Event Wrap

The US Federal Reserve’s FOMC meeting delivered a statement which exceeded market expectations of a dovish message. The FOMC reaffirmed their commitment to patience, but the downgraded dot plot projections and economic forecasts suggest the Fed has all but abandoned its normalization path. The median 2019 dot plot projection is for no hikes, with 11 among 17 dots at zero, though the dots still pencil in a 25bp hike next year and left the long run median unchanged at 2.75%. The balance sheet run down will end in Sep – probably several months earlier than many thought- with the pace of shrinkage to slow from May. The statement has a couple less upbeat pockets of commentary, noting “growth has slowed”. Forecast downgrades included a cut to the 2019 GDP median of 2.1% from 2.3%, with 2020 cut to 1.9% (-0.1ppt), PCE projections were trimmed 0.1% across the forecast period, and unemployment forecasts were lifted.

Event Outlook

NZ: Q4 GDP is expected to have grown 0.6% (Westpac expects 0.3%), slowing the annual growth rate from 2.6% to 2.5%.

Australia: Feb employment is expected to rise by 15k and hold the unemployment rate at 5.0%. Westpac is forecasting a 5k decline with the unemployment rate edging up to 5.1%. The Mar RBA bulletin is released which will include an article on the wealth effect.

Euro Area: The EU Summit takes place from 21-22 and will involve a discussion on an extension to the Brexit deadline. The ECB Bulletin is released and the preliminary estimate for Mar consumer confidence.

UK: Feb retail sales are expected to decline 0.4% following Jan’s 1.0% gain with firmness supported by the labour market. The BoE policy decision is expected to be on hold. With Brexit uncertainty persisting, the Bank is likely to stick with their tentative, mild tightening bias.

Switzerland: The SNB Monetary Policy Assessment is released.

The big mover was the Fed of course with a dovish hold:

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Information received since the Federal Open Market Committee met in January indicates that the labor market remains strong but that growth of economic activity has slowed from its solid rate in the fourth quarter. Payroll employment was little changed in February, but job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Recent indicators point to slower growth of household spending and business fixed investment in the first quarter. On a 12-month basis, overall inflation has declined, largely as a result of lower energy prices; inflation for items other than food and energy remains near 2 percent. On balance, market-based measures of inflation compensation have remained low in recent months, and survey-based measures of longer-term inflation expectations are little changed.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.

The dots shifted only one more rate hike to 2020, via Goldman:

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And markets shifted to a 50/50 call on rate cuts in 2020 which is sensible enough give the Fed is now in neutral:

Readers will know that this is no surprise to me. I made the leap to an end of Fed tightening months ago. Undoubtedly the US is set to slow this year as the fiscal cliff arrives but, at this stage, I still don’t see any need to cut rates in the tea leaves. The labour market is still very tight and if it loosens a bit then that’s fine.

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We get a little run lower in DXY for a bit (or not). Just as the EUR failed to fall following ECB action. But I don’t see any huge move. I remain of the view that over the year weakening Aussie domestic and external conditions will keep pressure on the AUD.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.