Australian dollar jumps and stocks rise on restraint from US Federal Reserve Chairman Jerome Powell

The Australian dollar jumped 2.2% on the Fed’s decision, the biggest daily gain in more than a decade, as bond market revaluation pushed the greenback down 0.8% from against a basket of major currencies.

Up and down

Bonds were volatile, with two-year US Treasury yields, which track short-term interest rate expectations, falling 14 basis points to 2.65%, while 10-year yields The US fell 6 basis points to 2.95% in a steepening of the yield curve. .

Several Fed officials have expressed a desire to “quickly” bring the fed funds rate down to around 2.5% by the end of the year, a level they consider roughly “neutral” for the economy. American economy.

Following their US peers, Australian bond yields initially hit new seven-year highs of 3.13% for the three-year bond and 3.49% for the 10-year bond, before losing ground on Powell’s insurance. The three-year rate fell 6 basis points to return below 3%, while the 10-year rate fell 8 basis points to 3.37%.

Australian bond yields have steadily climbed on expectations that the Reserve Bank of Australia will be forced to accelerate the removal of its emergency policy settings. The central bank this week carried out its first tightening in more than a decade by raising the key rate to 0.35% from 0.1%.

Australian interbank futures imply another quarter-percentage-point rise in June, taking the spot rate to 0.6%. They imply 2.8% by the end of the year, which would equate to 10 increases of 25 basis points from the RBA’s remaining seven policy meetings.

The US Fed will reduce its balance sheet, which has swelled to around US$9 trillion during the pandemic, as it tries to fight soaring inflation and stage a soft landing.

Fed bond purchases will decline by $47.5 billion per month in June, July and August and up to $95 billion per month starting in September.

China on the radar

The Australian dollar stabilized at US72.46¢ on Thursday, still a far cry from a 10-month high of US76.61¢ hit just a month ago. The Aussie dollar was lower on US dollar strength on expectations of quick rate hikes from the Fed. Concerns about the health of the Chinese economy also weighed on the local currency.

Joseph Capurso, head of international economics at Commonwealth Bank, expects the local currency to consolidate in the near term before cracking to US76¢ by mid-year. But he said much of the fate of the Australian dollar hinged on China, Australia’s main export market.

A private sector survey released on Thursday showed China’s services sector activity contracted at the second-fastest rate on record in April, as COVID-19-related restrictions led to sharp reductions in new businesses and jobs. employment.

Dozens of major Chinese cities are in full or partial lockdown, including the commercial center of Shanghai.

Caixin’s Services Purchasing Managers’ Index (PMI) came in at 36.2 in April, down from 42 in March. The 50 point mark separates growth from contraction on a monthly basis.

The survey findings are in line with the government’s official PMI index, indicating rapid deterioration in a key sector that accounts for around 60% of the economy and half of urban jobs.

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