One should expect some push pull in USD trading this week, the lead up the FOMC on Thursday morning will create interesting positioning.
The market is clearly asking:
New Chair’s view on the US economy?
New voting members – who could they be?
Is the green shoot signs in inflation shifting dovish members?
Is employment at ‘full’ capacity leading to wage inflation in the FOMC’s opinion?
Is the huge round of fiscal stimulus in both tax cuts and government spending cause the Fed to counter this with monetary policy over the coming 18 months?
Will the Fed have to ditch the ‘gradual’ rises and go to a methodical?
Those question alone will push the USD.
Although a touch old here is the voting intentions of the FOMC board
As you can see there are plenty of holes in the voting core of the board. As the chart shows 7 voting member need to be appointed in 2018 and that alone adds a level of risk
When you add that Bill Dudley the New York Fed President is stepping down in June the hole gets bigger still.
It is why there is so much as play on Thursday and this will set the tone for most investment and trading in 2018.
From a trading position there is an interesting development coming in the AUD. If we take the interbank market and the surveyed economists come 5am Thursday morning AEDT for the first time in 19 years the Federal Funds Rate will overtake the RBA cash rate. Meaning bond differentials (in theory) should invert.
This chart gives a clear picture of what might happen to the AUD when the US v Australian bond differential invert.
(Source: Martin Currie Australia)
As the chart illustrates – this is a comparison between the Australian 10-year and the US 10-year. In the main The Australian 10-year has traded with a yield premium – meaning the carry trade has flowed to this country supporting the AUD.
However with the US 10-year set to overtake the Australian 10-year will the AUD revert to the 1998-2000 and sink to sub 50c? I suspect not, however it will lead to a pricing shift and a possible move to sub-72cents in the near term.
Looking at this point economically – USD denoted earners (exporters, firms that repatriate monies back into AUD) will benefit – however Australia is a net importer of capital, see the current accounts for confirmation of this. Foreign direct investment is a major economic driver for Australia – if projects start to suffer due to FX headwinds FDI will slow and that will hit GDP and equities that derive investment from FDI – something to think about.