Fed message now getting through – Westpac

Research Team at Westpac, notes that it has been a big week for central bank minutes, especially for AUD/USD.

Key Quotes

“On Wednesday, the US dollar rose across the board and US yields jagged higher in response to the minutes from the FOMC’s 26-27 April meeting. USD/JPY traded above 110 for the fi rst time since the Bank of Japan’s 28 April steady hand, AUD/USD dropped 75 pips and US 10 year Treasury yields extended their rise to 1.88%, printing yield highs since the 27 Apr meeting itself.

The FOMC minutes shocked markets into significantly revising Fed probabilities for upcoming meetings. Earlier this week we heard from FOMC members declaring the June meeting “live” and markets overly pessimistic, including San Francisco Fed’s Williams and Atlanta’s Lockhart, adding that they see scope for 2-3 hikes this year. Lockhart was particularly worth listening to last year, when he spent June-July talking about a potential Sep rate hike but was quick to express doubts about Sep when China’s FX and stock market turmoil rattled global markets in August 2015.

Well, it seems like markets should have been listening harder to Fed speakers, with the minutes clearly emphasising that June was live, but moreover “likely” if “incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the Committee’s 2 percent objective”.

Building on this hawkish bias in the minutes, there is a long list of Fed speakers in the next two weeks who will continue to emphasise these themes. This should continue to see well-worn themes of USD strength, bond yields higher and curves flattening.”