‘Don’t’ fight the Fed’ that old adage is very much alive and well and is one rule that has not been impacted but COVID.
Have a look at these Federal Open Market Committee’s (FOMC) statements from Wednesday:
- Atlanta Fed President Bostic repeated concerns over the sustainability of the US recovery due to the increased spread of COVID-19, referring to increased business concerns and consumer nervousness and stated the FOMC should look to continue its current programs of balance sheet expansion.
- Cleveland Fed President Mester expected structural changes to the economy resulting from COVID. She went on to state that without the proper flow of credit through functioning financial markets a credit crunch would occur. And thus, praised the Fed actions to allow markets to continue to work and provide credit during this time.
- Then there was Vic Chair Clarida and his comments sent the USD in to a frenzy and show that the Fed is ready for anything by stating: ‘there is no limit on how much mortgage-backed securities and treasuries the fed can buy…there’s more we could do in terms of our balance sheet program.’
Just to put what has happened at the Fed this year into some perspective in the three months to June the Fed’s balance sheet expanded to 13% of US GDP, it took the Fed 3 full years during the GFC to reach the same point. The FOMC is not meshing around here and will clearly do whatever it takes to shore up any credit issues it sees.
The FX fallout of this is that the USD is starting to firm up – which suggests FX is finally coming around to the idea that the global risks are outweighing the recovery.
EUR/USD is now in the middle of its $1.12 to $1.14 but at $1.1285 its showing signs, it could slip to the bottom of this band in the near term.
USD/JPY ranged between 107.10 and 107.40 which in itself supports the idea that risk-off positions are building.
AUD/USD has been interesting as it has held ground even with the news Victoria is going back into lockdown, but what is clear is that the bears are willing to defend $0.70 with real zeal and thus see small short opportunities if the pair runs up to this resistance level to grab 40-50pip trades.
Looking to the week ahead in Australian data:
FX has never been more affected by ‘confidence’ than it is now. Confidence has come to a clear indicator for economic activity and this week the business and consumer confidence numbers form Australia are due on Tuesday and Wednesday respectively. Thursday then see what is probably the most important data point in the COVID world – the employment figures, the biggest question is unemployment getting better or worse?