FX Update: FOMC minutes add to sense that Fed is catching up to the curve.

FX Trading focus: FOMC minutes reveal a hefty QT schedule.

A further sense that the Fed wants to focus on tightening conditions for asset markets as well as for the economy in general was in evidence in the FOMC minutes last night, which revealed plans for a rapid pace of quantitative tightening after the May 4 meeting. Some Fed members were in favor of not “capping” Fed balance sheet reductions at all – in other words, not rolling whatever treasuries and other assets were expiring in a given month, but in the end, members “generally agreed” that a cap of $60 billion on treasuries and $35 billion on MBS would be an appropriate pace of tightening – still nearly double of the maximum pace during the 2017-19 tightening and really well over double the average pace of the average tightening over much of that time frame. As well, the minutes indicated that more on the Fed were in favour of moving 50 basis points at the March 16 meeting, but went with the 25-basis point move due to the Russian invasion of Ukraine. In response to the FOMC minutes, risk sentiment stayed under pressure and the US dollar surged against risky currencies/EM. Some of the latter may have been on a significant extension of the crude oil sell-off, with the combination of supply improvements as the IEA will be adding to massive US strategic reserves releases and the demand situation in China has been heavily impacted by increasingly widespread lockdowns. Easing oil prices are a potential boon for the yen, as I discuss below.

Chart: AUDUSD
Focusing on AUDUSD for the third day in a row as it is the most interesting technical pair and sits astride at least a couple of themes, including the commodity overlay focus across markets of late, the situation in China, where lockdowns are pressuring activity, and general risk sentiment, where the Fed is fully engaged in playing catch-up in a bid to attain credibility with its latest ratcheting higher of rate expectations and now a vicious tightening regime that will settle over the market in the coming months. So far, the reversal here is most interesting in that it took place just after the modestly hawkish RBA upgrade to guidance this week triggered a sprint above the well-defined range resistance of 0.7556. That move has been reversed, but the up-trend from the lows early this year has not yet been erased and only gets full tested below 0.7400, with the 0.7300 area perhaps the point of final capitulation. Regardless, this pair is an interesting proxy for a number of themes and may have just experienced a key reversal.