AUD/USD Analysis and talking points
- AUD/USD supported by lower USD and equity supply
- Basic PCE in a nutshell
AUD/USD supported by lower USD and equity supply
The combination of a weaker dollar and a rally in risky assets has supported the Australian dollar in recent sessions, with the currency falling back to 0.7150. This was largely helped by recent comments from the Fed’s Bostic, who hinted at the potential for a Fed pause in September, data permitting. While this is notable in that it is the first Fed official to signal the possibility of a pause, speculation of such action has been muted at best and, of course, very data dependent. For now, inflation remains sticky and so the bearish argument for the USD remains muted, the Fed will continue to be hawkish and reluctant to back away from it.
Basic PCE in a nutshell
Looking ahead, today will see the release of the PCE and Core PCE price index, the latter being the Fed’s preferred measure of inflation. Core PCE is expected to fall to 4.9% from 5.2%, while data is not normally a noticeable driver for markets, the market reaction will depend on how much it deviates from market consensus. Elsewhere, today is the end of the month in cash (two days before the actual end of the month), which could see a bout of demand for USD, causing AUD/USD to pull back slightly. On the technical front, key resistance lies at 0.7255-65, while support lies at 0.7040.
AUD/USD chart: daily time frame
FX MONTH-END REBALANCING EXPLAINED
London WMR Fix (1600 London Time): The WMR Fix is one of the most widely used benchmarks for FX trading, taking place daily in a 5 minute window around 1600 London time. The patch provides a standard set of benchmark currency rates so stock and bond investors can compare portfolio valuations and performance with each other.
The WMR patch tends to coincide with a large increase in trading volume, leading to a large increase in liquidity. Sometimes this allows large real money flows to take place without causing too much distortion. However, flows can also be dominant in one direction (strong buying or strong selling) leading to outsized moves in a very short time.
The biggest bout of volatility comes from the month-end patch, which takes place on the last business day, where extreme market moves can often occur upstream between 3:00 p.m. and 4:00 p.m. London time. These foreign exchange flows come primarily from equity rebalancing.
Thus, if a UK portfolio manager holds assets denominated in US dollars and seeks to hedge currency risk, a monthly increase in the value of those assets will lead to more dollar hedging (selling of dollars). For example, if stocks are currency hedged and US stocks (S&P 500) rose during the month, while the FTSE 100 (UK stock market) traded flat, UK-based investors Uni would sell US dollars against the pound to add to their hedge. , leading to an appreciation of the GBP/USD. The greater the outperformance of the US stock market against the UK, the more the dollar would sell the USD against the pound, which would encourage the pound to rise even higher. However, extreme movements can often partially return the day after the month-end patch. That said, the occurrence of such an event in a market as liquid as FX suggests that the London fix (especially the month-end fix) is an important one for FX traders to watch.