FOMC, Asia-Pacific Stock Markets, AUD/USD, DXY Index – TALKING POINTS
- US Dollar hammered following the FOMC rate decision and comments by Jerome Powell
- Google search terms for overheated stock markets could signal a possible return to reality
- AUD/USD may be showing signs of topping despite DXY, a USD index, continuing to fall
Wall Street ended on a less-than-happy note after the FOMC rate decision and follow-up press conference with Fed Chairman Jerome Powell. The S&P 500 closed 0.53 percent lower, with losses in the index primarily led by energy. Information technology was the only category in the benchmark that did not suffer a loss. This may help explain why the tech-oriented Nasdaq benchmark closed a little over 0.63 percent higher.
Foreign exchange markets were somewhat enigmatic. The anti-risk Swiss Franc and Japanese Yen emerged as the winners while HKD and the petroleum-linked NOK came in last place. The US Dollar was fell against all its G10 counterparts – except the Norwegian Krone – after the FOMC rate decision. Markets had largely expected for the Fed to keep rates unchanged, but the central bank’s outlook was the source of mystery.
Mr. Powell said that the median projection for interest rates is that they will be held near zero through 2022 due to the coronavirus posing a “considerable risk” to economic activity. He warned that millions may be out of work for some time, and stressed the need for fiscal and monetary effort. The Fed forecasts a 6.5 percent contraction in GDP for 2020 and warned that the BLS jobless rate is likely understating unemployment.
The Chairman acknowledged that the employment report in May was good and that there could be significant job growth in the coming months. He added that monetary authorities are not even thinking about raising rates and are prepared to adjust their bond-purchasing program as needed. They expressed commitment to using the widest set of tools available. The central bank did not indicate that yield curve control was off of the table.
Surprisingly, equity markets did not react with optimistic buoyancy despite the prospect of being given easy credit access for years. The Fed conveyed a cautious tone when it came to economic statistics, noting that they will not overreact to a single data point – like the jobs report in May. Some indicators have been showing signs of stabilization in some sectors, but – to quote Mr. Powell – it’s a “long” road ahead for the economy.
Thursday’s Asia-Pacific Preview
A bare data docket will likely put the focus on market themes with the most recent one being the FOMC. The dynamic during Wall Street trade could spill into Asia and infect APAC stocks and lead to a further widening of credit spreads in regional corporate debt markets. The anti-risk Japanese Yen and Swiss Franc may prosper in this environment while the commodity-linked Australian and New Zealand Dollars may suffer.
Bullish sentiment in stocks may also start deteriorating as more investors question the sustainability of remarkable returns. In the past few weeks, the terms “Irrational Exuberance”, “Stock Market Too High” and “Stock Market Overbought” have surged beyond a one-year high. Doubt about the ability of equity markets to continue climbing could cause capital to flow out of stocks and into anti-risk currencies like JPY.
AUD/USD has once again failed to clear the late-December early-January swing-high at 0.7018, with a risk that closing below support at 0.6911 could signal the beginning of a broader pullback. In the latter scenario, sellers may encounter friction at 0.6642 before turning lower. Cracking that floor with follow-through could cast a bearish shadow over AUD/USD and open the door to even more selling pressure.
AUD/USD – Daily Chart
AUD/USD chart created using TradingView
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US Dollar Price Chart
The US Dollar Index (DXY) continues face heightened liquidation pressure. The Greenback just cleared below a narrow stalling zone between 97.09 and 96.60 and now appears to be heading towards a two-tiered support range between 95.07 and 94.65. Sellers may start backing off around the first floor, though if downside momentum remains strong, the USD could retest the two-year floor at 94.65.
DXY – Daily Chart
DXY chart created using TradingView
— Written by Dimitri Zabelin, Currency Analyst for DailyFX.com
To contact Dimitri, use the comments section below or @ZabelinDimitriTwitter