Fed Signals and the RBA Decision

The US dollar edged lower Monday on mixed messages from Fed speakers. The Australian dollar cruised on retail sales to the best performance of the day while USD lagged. In the hours ahead, the Japanese market reopens after a holiday and Kuroda speaks but we focus on the RBA decision. 

The dollar decline on Monday probably said more about the depth of rally late last week than anything fundamental. Market watchers could use Fed speak to justify which ever way they were leaning. Bullard emphasized data dependency. Rosengren, who is probably the most dovish Fed member, said a taper in December compared to April is not too significant. Williams said QE has been a close call. Powell said monetary policy will remain accommodative for some time.

None of the headlines inspired any direct moves in the FX market as the US dollar drifted gently higher. The turnaround in EUR/USD may have been significant and the chart indicates a potential false break below the Oct lows and the 55-day moving average. Ultimately, we believe the ECB won't cut rates and that will deliver the final verdict.

One underreported reason the Fed may delay the taper is Treasury bond issuance. The quarterly refunding announcement revealed $266 billion in Q4 borrowing compared to the $235 billion estimated in July. An additional $31 billion in issuance along with $10-15 billion less Fed buying would be a double-dose of pressure on the bond market.

The RBA decision at 0330 GMT is the highlight of trading in the day ahead. The realization that rates have bottomed has underpinned the latest AUD/USD rally but there is scant talk of rate hikes. For sure the RBA will be on hold today but only 10 bps of hikes are priced in for the coming 12 months. If that holds, the RBA will have held at the cycle bottom for 15 months compared to 5 months and 4 months in the previous cycle troughs.

A slow move toward optimism would be a queue to price in rate hikes and buy the Aussie.