February flew by so fast that it’s now been confirmed to be the shortest month of the year. A month where economists undercooked each major data ‘forecast’ out of the US and E/Z, or if we are to let them off, the data came in hotter than anyone expected – including markets.
These markets are moving to the beat of the Fed and in particular Fed re-pricing. Last month we talked about soft/hard landings, only for ‘no-landing’ to then be introduced to the narrative… we might not bother with that one.
While writing this letter, we’ve seen a dramatic collapse of Silicon Valley Bank and basically a Government bailout, combined with a quite remarkable turnaround in the bond/rates markets. The original stories here were written just before all of this unfolded but we’ve left it in, to show the timeline of how things went over the week.
Let’s kick things off with what happened with the Fed Chair in Congress last week (w/c 06/03):
A Hawkish Powell
Fed Chair Jerome Powell says if incoming data indicates faster tightening is required they are prepared to increase the pace of hikes.
Powell added in his remarks to the Senate Banking Committee that ultimately the level of interest rates is likely to be higher than previously anticipated.
US yields and the US Dollar have spiked higher and US stock futures have dropped sharply on the news.
As a reminder, this is one of the final times the Fed Chair will speak formally before going into the blackout period ahead of the March 22nd FOMC meeting.
A Dovish RBA
Australia’s central bank, the RBA, has raised its cash rate to its highest level since May 2012 but the Aussie $ fell?
The central bank increased rates by 25bps to 3.6%, however, the bank also indicated a pause in its 10-month tightening cycle, leading to a selloff in the Australian dollar.
RBA Governor Philip Lowe said in his statement that the bank will pay close attention to incoming economic data when assessing “when and how much further” rates need to go up.
Investors are now positioning for a slowdown in the pace of future hikes, and the RBA could pause at its next meeting in April. This is in contrast to the US where the hawkish tone from the Fed has created a divergence in rate expectations over the next six months.
As a result, AUD/USD is now trading at its weakest level this year.
Here we see a Bloomberg chart showing the RBA cash rate in 6 months vs the Fed funds rate expected in 6 months, you can clearly see the recent divergence and why we might see the Aussie lower against the USD:
To continue reading this article…
This Newsletter is FREE to Trade View Clients.
If you are an existing client please LOG IN.
Our Monthly Newsletters
Unlimited access
A$9.90/mo.
No lock-in contracts.
