Double blow to AUDUSD

A double blow for the AUDUSD this morning as the FOMC delivered what at first glance appears a “hawkish cut”, followed by a mixed Australian labour force report for August.

As expected, this morning, the FOMC lowered the federal funds target range by 25bp to 1.75-2%. The statement affirmed that the Fed would “act as appropriate to sustain the expansion” and offered little else in the way of guidance for future rate cuts.

The lack of guidance and the all-important dot plots that showed only 7 of 17 members forecast another rate by year-end were less dovish than hoped. However, the likely makeup of the vote is important. Of the 7 members who voted for another rate cut in 2019, three are likely to be key voting members and Fed leaders Powell, Clarida and Williams.

Hence assuming there is no significant easing of U.S.- China trade tensions and the growth outlook remains uncertain into year-end, it is highly likely the Fed will cut rates again either in October or December, cemented by a vote of 7-3 or even 8-2.

Locally this morning’s Australian labour force report showed employment growth of +35k vs market consensus of +10k and the participation rate reached a new high of 66.2%. The key narrative though was the rise in the unemployment rate to 5.3%, joined by a rise in the underemployment rate to 8.6% confirming spare capacity remains in the labour market.

Spare labour market capacity and rising unemployment is a key concern of the RBA. Furthermore, it acts to keep wage growth stagnant and limits the ability of inflation to return to the 2-3% target band. Enough reasons then for the RBA to cut rates again this year, most likely in November.

Today’s developments have resulted in the AUDUSD convincingly breaking below the pivotal support at .6820/00, that comes from the half a dozen daily highs the AUDUSD traded to during August.

The decline from the recent .6895 high has now become more impulsive in appearance, and this tilts the odds in favour of lower prices. In the short term, I would expect sellers on bounces to emerge near the .6820/30 resistance zone and on the downside support at .6685/75 remains strong.

Source Tradingview. The figures stated are as of the 19th of September 2019. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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