Fed taper and the AUD

See the latest Australian dollar analysis here:

Macro Afternoon

MUFG on the Fed this week:

Fed in focus with USD set to remain supported as shorts are lightened

USD: Fed tapering discussions “progressing”. The primary macro event this week will be the FOMC meeting on Tuesday and Wednesday and these meetings are increasingly important given we are gradually approaching the time of commencing the tapering of QE. With the Fed purchasing USD 120bn worth of UST bonds and MBS per month, the scope for that being sustained is diminishing. We see no reason for the Fed to change course and expect Fed Chair Powell to continue expressing cautious optimism over the outlook and therefore signal that discussions on tapering QE are progressing. Earlier this month, Chair Powell stated that achieving “substantial further progress” with achieving the goals on inflation and employment required to start tapering was still “a ways off”. It would be difficult to drop that now given that comment was made after the NFP andCPI data but he may well express greater confidence on progress that could set the market’s up for believing Jackson Hole in August and the FOMC in September could be the key events to set up the start of QE tapering either at the September meeting or the meeting in early November.

The pick-up in the Delta variant is a greater risk at this meeting but we do not expect that to alter the tone of the meeting greatly. Reported cases have picked up but with163mn(close to 50%), the fears over disruption, while still there,are receding. The declining daily COVID infection rate in the UK will also be reassuring as the Fed meets this week. All in all, the FOMC meeting should prove supportive of the belief of moving toward the point of tapering. Some of the Fed tightening that had been built into market pricing at the short-end of the yield curve since the June FOMC has started to reverse of late but we do not see the meeting further extending that reversal. Longer-term yields have already reversed having reached extreme lows unjustified by broader fundamentals and equity markets. Yields could extend further higher. Assuming progress toward the point of QE tapering remains post-FOMC, the US dollar should remain supported.The momentum continues to be toward the paring back of USD short positioning in the market. The IMM data on Friday revealed the sixth consecutive week of short positions being cut withclosetoa50%reductionfrom the peak short position in the week to 8th June. In fact the two-week reduction in USD shorts (153k) was the largest since March 2013. With positioning becoming more balanced, we suspect based on our assumption for the FOMC meeting that gains for the dollar at this stage will be more modest and contained.

That seems about right for now. Although US growth is fading, there is no cause for panic yet, unless the Fed really has lost the proverbial plot.

CS is still bearish on AUD technicals:

AUDUSD is turning lower again and we stay bearish, with next supports at .7288, then .7221/09 AUDUSD seems to be resuming its downtrend, in line with the major top that remains in place, weekly MACD turning outright bearish and with medium-term moving averages close to bearishly crossing lower. We therefore maintain our core bearish view, looking for a cap below .7398/7404. Support is then seen at.7288, ahead of .7221/09–the 78.6% retracement of the rally from last November. Whilst we would look for this latter support to hold at first, below in due course should see support next at.7159/45 and eventually our core objective at .7085/43–the “measured top objective” and 38.2% retracement of the entire2020/2021 bull trend, where our attention would turn towards signs of a floor. As above, the immediate risk seen lower whilst below.7398/7404. Above can see a recovery back to price resistance at .7485/7507, which we would look to cap if reached.

Despite last night’s bounce, these technical levels are all intact.

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