Headlines

*Pelosi vows US won’t abandon Taiwan in face of Chinese pressure

*Dollar climbs with yields after Fed doves expect more rate hikes

*Yen recovery cut short after biggest four-day rally since 2020

*Asian stocks stabilise despite Wall Street slide and geopolitical tensions

US equities fell following hawkish Fed rhetoric and heightened worries over Pelosi’s trip to Taiwan. The S&P500 and Nasdaq both declined after a choppy day, by 0.67% and 0.3%. The Dow underperformed with a fall of 1.2% as industrials weighed heavily. Asian markets rebounded with the Nikkei gaining from Tuesday’s two-week closing low. Chinese shares recovered with relief on no major confrontation overnight. Futures are mildly in the green.  

USD is trading near yesterday’s close after rebounding strongly yesterday. Prices fell very close to the 100-day SMA on the DXY at 130.38. EUR dropped sharply having printed a high at 1.0293. The major remains at a sub-1.02 level this morning. GBP failed to make a new high for the week and is sat on mid-May support at 1.2155. USD/JPY is taking a breather this morning. The prior day’s rally took prices back above the may high at 131.34.

Event Takeaway – RBA “not on a pre-set path”

As expected, the RBA hiked rates for a third straight 50bp hike yesterday. Stubbornly high inflation is seen peaking at around 7.75% this year. It then drops to 4% in 2023 and around 3% in 2024. But Governor Lowe remains upbeat about current economic conditions. Growth is still expected to expand strongly this year.  This is aided by record high terms of trade. Policymakers predict only a very modest weakening in the labour market.

The RBA expects more tightening in the coming months. But it added that it is not on a pre-set path. Markets saw this as a hint that jumbo rate hikes might be off the table and trimmed bets for a 50bp September hike back to 25bps. AUD fell sharply on the supposed dovish signals. However, we note that the neutral policy rate is still seen at 2.5%. The current cash rate at 1.85% remains some way short of this.  Data will be key going forward to judge whether the market has overreacted. Friday’s RBA statement will be a major focus.

Chart of the Day – AUD/USD falls back below 0.70

The aussie has had to contend with geopolitical issues and a potentially more dovish RBA this week. We also highlighted iron ore prices in this week’s webinar as one of the main drivers of AUD. The metal is Australia’s number one export and prices have slumped in recent months.

It is probably the negative China-related sentiment that is the main current driver. We still think a 50bp rate hike in September is highly possible, all things being equal. AUD/USD has bounced sharply since its low in mid-July at 0.6681. But the 0.70 marker is crucial for the aussie. It has been going back to late 2015. The 50-day SMA is initial resistance at 0.6959, then Monday’s high at 0.7047. Near-term support is the downward trendline just below 0.69 and 0.6850.