Yellen Won’t Let Go, RBA Next
Fed Chair Janet Yellen highlighted uncertainty in the economic outlook and made no mention of a hike in the 'coming months' but maintained some optimism. The Canadian dollar led the way Monday while the yen lagged. The RBA decision is next. The Premium Insights closed the USDCAD short at 1.2835 from the 1.3100 entry for a 265-pip gain. 8 trades remain in progress, including a CAD long.
Less that two weeks ago Yellen said a hike was likely in the coming months if the economy developed as she expected. But the jobs report raised huge questions about the path of investment, employment and growth so she switched to a more cautious stance while maintaining an overall hawkish bias. “New questions about the economic outlook have been raised by recent labor market data,” she said.
In the Fed funds futures market, the likelihood of a July hike fell to 21% from 27%. The chance of a June hike is now virtually nil. Stocks liked it and the S&P 500 rose to the highest level of the year.
What's unclear is if a dovish Fed alone can sustain risk assets. Over the past 15 months, the Fed has repeatedly backed away from hikes but the market has struggled to sustain new highs.
Looking ahead, the RBA decision is the highlight of Asia-Pacific trading but a change from the 1.75% cash rate is unlikely. The OIS market sees a 10% chance of another surprise cut but traders will mostly be watching Stevens for a dovish hint about the July or September decisions.
The announcement is due at 0445 GMT (0545 BST/London) and follows a cut at the May 4 meeting. After that surprise move, the market began pricing in more cuts. However, the meeting minutes released later suggested the surprise cut was a close call and that led to an AUD bounce on speculation of a longer wait before another cut.
Recent economic data included soft wages, a modestly disappointing jobs report and signs of slowing construction (including a soft AiG index earlier today). But the biggest release was Q1 GDP as it jumped to 1.1% q/q versus 0.8% expected on strong trade. That number crushed hopes of a cut today but the market is reluctant to abandon the coming meetings.
For the July 27 meeting, the market is pricing a 31.4% chance of a cut and for August, that rises to 51.2%. The Australian dollar lagged risk assets and commodity FX Monday so there may be an element of catch-up if Stevens isn't outright dovish.
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