Dollar Selloff Resumed after FOMC, Commodity Currencies the Best Performers

Dollar’s broad based selloff resumed overnight after Fed kept monetary policies unchanged. The move was seen as reaction to Fed’s slight tweak in description of inflation. Also, Fed’s indication that balance sheet normalization would start very soon suggest that it will push another rate hike, if any to December. While the greenback is weak, it’s still slightly better than the Swiss Franc. The Franc dived yesterday in catch up to recent developments in the financial markets and there is no sign of halting yet. Commodity currencies are the best performer this week as markets are on full risk-on mode.

Fed to start balance sheet normalization "relatively soon"

Fed left its monetary policy unchanged, maintaining the federal funds rate target at 1-1.25%. The Fed made two tweak in the statement, though. First, it noted that balance sheet reduction would begin ‘relatively soon’, signaling that the official announcement would come in September. Second, policymakers revised lower the outlook on core inflation. US dollar plunged, with the weighted index falling to a 13-month low as the market interpreted the inflation assessment as dovish.

More on FOMC:

• FOMC Signaled To Begin Balance Sheet Normalization ‘Relatively Soon’, Downgraded Core Inflation Assessment
• Dollar Resumes The Unwind As Fed Fail To Impress
• FOMC Review: Smidgen Dovish But It Does Not Alter The Overall Picture
• FOMC: Steady As She Goes
• Little-Changed FOMC Statement Maintains Dovish Uncertainty, Weighs Further On Dollar
• Fed Stands Pat as Expected, Signals Coming Balance Sheet Normalization
• Fed Acknowledges the Inflation Miss, But Sticks to Balance Sheet Plans

DOW at record thanks to Boeing, not Fed

DOW surged 97.58 pts, or 0.45% to close at record high at 97.58 overnight. But it should be noted that the index has gapped up at 21690.38 at open already and barely moved after FOMC announcement. The surge was mainly driven by Boeing upgrading its forecast for the year after posting strong earnings. The 9.9% gain in Boeing has indeed added 144 pts to DOW. Overall, in spite of weak momentum, the index is still on course for 61.8% projection of 17883.56 to 21169.11 from 20379.55 at 22410.01.

RBA Lowe warned of prolonged weak wage growth

In Australia, RBA governor Philip Lowe warned that prolonged weakness in wage growth could hurt the economy. He said that "if workers are getting no real wage increase year after year after year that’s insidious." And, he emphasized that high wage growth "would help get inflation back to target and I think people would feel a bit better as well, and the fact that many of us have lowered our expectations of future income growth means we’re less inclined to spend."

Regarding monetary policy, Lowe noted that "the main effect of lower interest rates is that more people have jobs". And "that’s why I’m very comfortable with the current setting of monetary policy, it’s helped people get jobs." Regarding the exchange rate, Lowe said that "it would be better if the exchange rate were a bit lower than it currently is. It would help generate more jobs, push inflation a bit closer to our target — so that’s the solution to a competitiveness problem."

On the data front

Australia import price index dropped -0.1% qoq in Q2. German Gfk consumer sentiment and Eurozone M3 will be featured in European session. UK will also release CBI realized sales. US will release durable goods orders, trade balance and jobless claims.

AUD/USD Daily Outlook

Daily Pivots: (S1) 0.7917; (P) 0.7965; (R1) 0.8053; More…

AUD/USD’s rally resumed by taking out 0.7988 and reaches as high as 0.8065 so far. Intraday bias is back on the upside. Current rise from 0.7328 is now targeting next key projection level at 100% projection of 0.6826 to 0.7833 from 0.7328 at 0.8335. On the downside, break of 0.7877 support is needed to indicate short term topping. Otherwise, outlook will remain bullish in case of retreat.

In the bigger picture, current development suggests that rebound from 0.6826 is developing into a medium term rise. There is no confirmation of trend reversal yet and we’ll continue to treat such rebound as a corrective pattern. But in any case, further rise is now expected to 55 month EMA (now at 0.8100) or even further to 38.2% retracement of 1.1079 to 0.6826 at 0.8451. Break of 0.7328 support is needed to confirm completion of the rebound. Otherwise, further rise is now expected.

Economic Indicators Update