Australian dollar blasts higher on uber-dovish Fed

See the latest Australian dollar analysis here:

Macro Afternoon

DXY slumped last night. CNY was soft. EUR rose:

The Australian dollar blasted off versus DMs:

But was mixed against EMs:

Gold broke out:

Oil keeps falling:

Metals keep laughing:

Miners were soft:

EM stocks firm:

Junk fell with oil:

Treasuries rampaged:

With bunds:

Aussie bonds were bid:

Stocks rebounded from losses:

Westpac has the wrap:

Event Wrap

Manufacturing sentiment in the Philly region rebounded strongly in July, the Philadelphia Fed general activity survey surging to a one-year high of 21.5 from 0.3, exceeding even the most bullish forecasts; orders, shipments and employment all saw solid increases. The Conference Board’s US economic leading index fell 0.3%, weaker than expected. US jobless claims hovered down near general lows for yet another week; +216k from 208k the prior week.

UK June retail sales surprised with an outsized rise against expectations for weak sales. Headline sales rose +1.0%m/m and +3.8%y/y (est. -0/3%m/m and +2.6%y/y) whilst ex fuel rose +0.9%m/m and +3.6%y/y (est. -0.2m/m, +2.6%y/y). The gains were across all sectors except for department stores. The share of internet sales unexpectedly slipped due to the rise being predominantly across bricks and mortar sales.

EU’s Barnier and Irish PM Varadkar both indicated a degree of willingness to negotiate once the new UK PM is confirmed, suggesting that they were open to alternatives around the Irish border and even a further extension to the current 31 October deadline.

UK Parliament voted to block moves towards a no-deal Brexit with the House of Commons voting 315-274 for the block due to a series of Conservatives abstaining or defying the Party Whip.

Event Outlook

Japan: Jun CPI is expected to show headline inflation holding at 0.7%yr.

US: Jul University of Michigan consumer sentiment (preliminary) is anticipated to remain above average at 98.4. Fedspeak involves Bullard on technology and the future of the financial system and Rosengren sits on a panel on central bank independence at an event at Columbia University.

New York Fed President John Williams gave the most dovish speech I can remember from a Fed governor:

My wife is a professor of nursing, and she says one of the best things you can do for your children is to get them vaccinated. It’s better to deal with the short-term pain of a shot than to take the risk that they’ll contract a disease later on.

I think about monetary policy near the zero lower bound—or ZLB for short—in much the same way. It’s better to take preventative measures than to wait for disaster to unfold.

Today I’m going to talk about three things: first, the heightened relevance of the ZLB for monetary policy; second, the strategies designed to mitigate the effects of the ZLB in an economic downturn; and finally, why these strategies are so important for achieving our monetary policy goals.

I’ve already referred to monetary policy several times. So, before I go any further, I need to give the standard Fed disclaimer that the views I express today are mine alone and do not necessarily reflect those of the Federal Open Market Committee or others in the Federal Reserve System.

…Our current estimates of r-star in the United States are around half a percent. That’s actually now lower than at any time before the Great Recession. We’ve seen similar declines in r-star in other advanced economies, including in Japan and the euro area.

As shown in Figure 1, the weighted average of estimates of r-star for Canada, the euro area, Japan, the United Kingdom, and the United States is now also half a percent, nearly 2 percentage points below where it stood at the turn of this century.

These very low neutral rates are a result of long-term structural factors slowing growth. They’re driven by demographic changes and slow productivity growth, which are unlikely to reverse any time soon.

Low r-star implies that many central banks will be grappling with the challenges of life near the ZLB, which is why it’s so critical to consider how the ZLB alters strategies related to monetary policy.

And that’s exactly the question we looked at around 20 years ago. In a paper and subsequent FOMC briefing in January 2002, my colleague Dave Reifschneider and I evaluated the effects of the ZLB on the macro economy and examined alternative monetary policy strategies to mitigate the effects of the ZLB.

This work highlighted a number of conclusions based on model simulations. In particular, monetary policy can mitigate the effects of the ZLB in several ways:

The first: don’t keep your powder dry—that is, move more quickly to add monetary stimulus than you otherwise might. When the ZLB is nowhere in view, one can afford to move slowly and take a “wait and see” approach to gain additional clarity about potentially adverse economic developments. But not when interest rates are in the vicinity of the ZLB. In that case, you want to do the opposite, and vaccinate against further ills. When you only have so much stimulus at your disposal, it pays to act quickly to lower rates at the first sign of economic distress.

This brings me to my second conclusion, which is to keep interest rates lower for longer. The expectation of lower interest rates in the future lowers yields on bonds and thereby fosters more favorable financial conditions overall. This will allow the stimulus to pick up steam, support economic growth over the medium term, and allow inflation to rise.

These first two conclusions featured in my paper with Dave Reifschneider from 2000. In that paper, these ideas were described as modifications of an otherwise standard Taylor rule for monetary policy. The “forward-looking adjustment” to the Taylor rule illustrated the idea of moving in advance of a downturn to provide timely stimulus. The “backward-looking adjustment” illustrated the idea of keeping interest rates lower for longer.

Finally, policies that promise temporarily higher inflation following ZLB episodes can help generate a faster recovery and better sustain price stability over the longer run. In model simulations, these “make-up” strategies can mitigate nearly all of the adverse effects of the ZLB.

One particular benefit is that such strategies can be highly effective at keeping inflation near the target on average, thereby anchoring inflation expectations at the desired level.

…One reason it’s been hard to sustain inflation at the target rate is that persistently low inflation due to policy being constrained by the ZLB can feed into inflation expectations. If inflation gets stuck too low—below the 2 percent goal—people may start to expect it to stay that way, creating a feedback loop, pushing inflation further down over the longer term.

The lower average level of inflation translates into a lower level of interest rates cuts available during a downturn, making it even harder for policymakers to achieve their goals.

…This downward slippage of longer-run inflation expectations, if it persists, implies that in the future central banks start further from their inflation goals and have even less room to maneuver, making the problem of low r-star and the ZLB even more difficult.

…The key lessons from this research hold today and in the future. First, take swift action when faced with adverse economic conditions. Second, keep interest rates lower for longer. And third, adapt monetary policy strategies to succeed in the context of low r-star and the ZLB.

These actions, taken together, should vaccinate the economy and protect it from the more insidious disease of too low inflation.

Markets are now pricing a greater chance of a 50bps than 25bps cut for this month’s FOMC meeting:

That still seems a desperate move to me but it’s hard to disagree with this kind of uber-dovishness emanating the Fed.

So long as that holds sway then AUD has little choice but to rise. Given the chart breakout the path of least resistance is higher in the short term. That said, I still don’t see it getting overly far as the ECB joins in, the PBOC follows, bulk commodities fall, the RBA cuts again, and US growth and inflation still out-performs everywhere else.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)


  1. reusachtigeMEMBER

    The higher our currency the better as it means we are strong and can buy more stuff, which everyone loves. It also means our house prices are going to be extremely absolutely guaranteed to be well positively good value into the future. So I hope we get back over par with the US because that was when we were absolutely ace as. Now is probably everyone’s last chance to gear up into the new boom. Everyone who is anyone is doing it!! And it will only get better with more Lower teh interest rates, that will fix thing…

    • Reusa, it may please you to know that I bought a house (*). When do I get the exclusive membership pass to the cool club? 🙂

      (*) – Though not a Mega Mortgage Mug (MMM). In fact, no big bank mortgage at all – I put in 25% while the Bank of Uncle & Aunt put in the other 75% as a loan. 🙂

    • I read that article LBS, “Trump wants a lower dollar”, he also wants a blonde hooker with big tits.
      Doesn’t look like either will happen at the moment

      • reusachtigeMEMBER

        Why not? Obtaining a blonde hooker with big tits is easy as especially for a president!

      • Shows how totally out of touch with reality tards like u are. You really think trump (given the power and access to resources he has) couldnt arrange for a blonde hooker with big tits at the click of a finger? Heck, if he so desired he could probably arrange to bang your mum. Im guessing she’d need the coin

      • Micro, maybe re-read what you responded to a few times, then apologies to the great man,.. and move on.

      • I lake where this is going.

        Ps, blonde hair and big tits are optional extras that can be specced for any lady these days. Bc’s mum included.

  2. Is it bullshi+e, insanity or inanity of these ivory tower braniacs:

    “The lower average level of inflation translates into a lower level of interest rates cuts available during a downturn, making it even harder for policymakers to achieve their goals.”

    He says we need higher inflation so they can cut interest rates. That’s an inadvertent admission they have no control. The only reason they like inflation is it’s essential in a fractional currency world with interest. How can most debt get paid back, except with more debt? Herein lies the problem. Via the creation in the last 40 odd years of massively gigantic unsustainable walls of debt we’ve brought vast amounts of consumption forward to allow a very small proportion of the planet to get exceedingly wealthy, and yes we have improved living standards in the sense we’re all allowed ourselves to become addicted to our iPhones and shopping for crap we don’t really need, but what we’ve really done is crucify the planet and gone a long way to deconstruct our communities in our pursuit of wealth and happiness. Long live inflation!

    • GeordieMEMBER

      The denial of reality in mainstream economics mirrors the sweet FA we’re doing to halt anthropogenic climate change. It’s human nature. Both very real and obvious problems that nobody running the shirt-show wants to do more than pay lip service to and then continue thrashing the dead horse till it’s pulp.

      Bet you can find examples of similar change fearing, comfort bubble driven delusions in your workplace or in that of your clients?

      • The Traveling Wilbur

        I was corrected on one of those recently. By a police officer (in conversation). Though I would have said “suspend” rather than “fix” myself.

        Interesting approach to community relations.

  3. The reason the FED is cutting it’s not domestic, the rest if the world Europe Asia Japan EM is more of a disaster, we are now in the first stages of the next financial crisis, traders know that you start getting extreme irrational moves either way. Like HNH said and Chris B yesterday AUD is going up just because.
    What we always did on the trading desks is halve the size of the trades and move your buy and sell orders to where you would normally put your SL.
    H2 you’ll see vicious irrational moves as people panic.
    The end position will be a rising USD because it’s reserve safe haven, rush to short end treasury yields
    I’d have to disagree think you’ll see the same thing with gold, I feel you’ll see gold lower before it rises, guess time will tell

    • HNH was right last month, said AUD market was too short to go much lower which was right, how high do we go? I was on the train yesterday and one of those simple AUDUSD charts was on my phone and I thought, although I think it should go lower it looks likes it’s going up, just because. I didn’t look at the figures, don’t think figures matter much now, everyone knows the world outside of USA is a disaster.
      You’ll probably get the bull trap on DXY too. Think you just have to not get clouded by the noise and comments
      It’s more than likely over next year
      We will see USD higher
      US bond yields lower I think across the curve
      AUSSIE GOV bond yields lower
      Think MB is right, ASX can’t keep running higher on lower yields forever, think you’ll see a sell off
      Think if AUSSIE 10 years breaks 1.20% think you’ll see quick falls through 1%
      I (think) we will see RBA cash rate at 0 before Xmas
      Think you’ll see oil maybe under $30 and other commodities lower before rising after.

      Later I like all precious metals, really think AGRI commodities, will rise too after the crash. I’m not sure what to buy re AGRI, I’m researching ETFs
      I’m going to buy oil if we see under $30 for long term. No one talks about AGRI, but think essential items will be strong after this debt Ponzi scheme collapses

      • I’ve been looking at AAC but be more comfortable if it goes below 95c. But lowest it got was 98c- over the last 2 months. I think they are turning the business around and their strategy to focus on premium meat (like Reusa’s) is right way to go.

      • Very interesting comment bcnich. I’ll admit that I’m just a total bystander vis fx and claim no expertise. Shorter term stuff does whatever. But it’s clear tha our internal economy means zero, what matters is the current high prices being paid for our commodities, especially minerals and gas. That’s all the rest of the world cares about, and that will destroy whatever is left in our cities and towns of value, such that when the world economy tanks big time and commodities go through the floor, we’ll sunddenly discover we’re no longer a first world country.

      • If MB ran a good global agri fund, I’d put money in
        MB think you need good global hard and soft commodity fund
        Precious metals and miners exposure to oil
        Miners are hard that can be some really shxxy companies
        Soft commodities agri maybe hedged international good quality agri companies
        Not many do it
        Every dick and his dog has ASX shares

  4. Jumping jack flash

    More cuts on the way then?

    Not for economic strength, they can’t possibly do that without creating more economy-crushing nonproductive debt. The cuts will be to stabilise the dollar.

    They may say they are to create jobs and grow wages and inflation but thats just insanity.

    • No, you just don’t get it. Our super economy creates wealth ™ through equity mate ™. hahaha

      • Jumping jack flash

        Yes, it worked so well!

        But in order to see a return of the heady days of yesteryear we need to grow the nation’s debt pile by at least 5 trillion freshly conjured debt dollars over the next 10 years. At least. More is certainly required to make up for the lacklustre debt growth of the last 10 years.

        We got 1% of rates to make it happen.
        Reckon we’ll get there?

      • Just print the stuff, or these days, type a few keystrokes to infinity. That’ll fix thing.

    • Jumping
      I saw Phil Lowe on TV last night saying disposable incomes will rise because of rate cuts because mortgage holders will have more money to pay their loans but forget to say he was ROGERING retirees at the same time
      So mortgage holders get a BJ and savers get a rogering
      So rate cuts are to help repay the $2TRILLION in household debt that goes straight back to the bank, MB can say what’s next but guess helps stopping the banks going under.
      Lowe did say increase NEWSTART. it’s about time we got rid of franking credits negative gearing and all the other rorts and give a bit back to the people struggling on new starts and maybe help the homeless.
      Poor (genuine) homeless are freezing their arse off as people step over them, poor guy was lying in his piss yesterday in Swanson St.
      They’ll be cutting rates coz they have no choice

      • Jumping jack flash

        Yes! They’ll certainly have no choice.
        Just like those last couple of cuts, and the next couple.

        RBA is talking through its hat, trying not to spook everyone.
        We hit zero, the US keeps cutting its dollar, the AUD starts soaring, and the RBA will need to think of something else to do to stabilise the currency.

        Currency war is back on?
        The US was just waiting for everyone to get to 0 interest rates I guess before they had another crack at it.
        We know what their plan is, it is proclaimed loudly any chance they get, in true American style.

        Raising Newstart and probably a UBI is kind of the only options we have left.
        Wages aren’t going anywhere. As the debt grows, wages actually shrink from the wage theft required to take on more debt. In fact the more migrants we import the less the growth will be – statistically.

        Wages have been in the gutter since 2008, its just that the statistics haven’t caught up until now because there’s some very, very highly paid people to counter the effect of all the stagnation. We reached that statistical tipping point only recently, and only due to the high immigration the highly paid people demanded!

        Regarding charity, charity is the first thing to go out the window when your electricity bill is gouged for 10 years so a few lucky people can support their existing debt pile and take on more.

    • Listened to John Hempton of short-seller Bronte Capital talk about a conversation he had with Guy Debelle (RBA).
      JH: The currency is our great stabiliser.
      Would you intervene if the dollar got to 60c?
      GDB: No
      JH: Would you intervene if the dollar got to 50c?
      GDB: No
      JH: Would you intervene if the dollar got to 40c?
      GDB: No
      JH: Would you intervene if the dollar got to 25c?
      GDB: I’m not going to answer that.