FX Update: USD has reversed. JPY, AUD put up a fight.

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FX Trading focus: USD remains firm on higher US yields, though AUD and JPY put up a fight overnight.

US yields followed through higher yesterday after the Friday payrolls and ISM Services data shocks, with the 2-year managing a poke at 4.50%, the highest yield level for that point on the yield curve since late November, with forward curve expectations for peak Fed rates at one point reaching a new cycle high of 5.15% yesterday (two full 25-bp hikes would take the rate to 5.00-5.25%) before easing back slightly. Fed speakers in abundance today (Fed Chair Powell to sit for an interview with the Economic Club of Washington) while a bevy of FOMC voters are out speaking tomorrow, but if there is anything that the last week has highlighted since the FOMC meeting reaction, it is that incoming data likely outweighs any guidance that the Fed itself provides. The next major data point is next week’s CPI number, but as we have emphasized, the near-term inflation levels are far less in focus relative to data pointing to labor market tightness, wage growth and activity levels potentially picking back up again.

Overnight, the RBA adjusted the official cash rate higher by 25 basis points, taking the policy rate to a rather pedestrian 3.35% as most expected. The guidance was far more hawkish than expected after the RBA seemed more in the “warming to the idea of a pause soon” camp in the prior meeting, apparently finding a bit of religion after the hot Q4 CPI print. The waffling December statement that “The Board expects to increase interest rates further over the period ahead, but it is not on a pre-set course.” was replaced with the far more hawkish “The Board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary.” At the same time, moderating the impact somewhat is the continued anticipation that the Australia economic outlook will soften this year. Australian 2-year yields rose about 16 basis points on the session as the market more fully priced another 50 basis points of tightening from the RBA in coming months.

Chart: AUDUSD
AUDUSD bounced fairly hard overnight after the vicious slide since mid-last week as the RBA waxed more hawkish than expected, forcing the market to tack on another 25-basis point hike before the RBA is seen reaching peak yields (still priced sub-4.00%) in the summer time frame.  From here, the RBA’s relative hawkishness will always matter, but as long as the market is adjusting Fed expectations and US treasury yields higher, the AUD may have a hard time turning the corner again on the greenback and sustaining a new rally above 0.7000. The sharp sell-off here has been a hefty blow to the up-trend, though it would be far more damaging to see a follow through lower from here that takes out the next levels like the 200-day moving average just above 0.6800, which could augur for a move toward 0.6500-0.6550.