AUD/USD awaits the Fed - Westpac

In respect with Australian markets, the market will be keenly awaiting the communication around this week’s highly anticipated Fed rate hike, which will be the 6th hike in the current cycle, which began in December 2015.

Key Quotes:

"Often when we are this far into a cycle, the market begins to pre-empt it’s end, with bonds often rallying after the policy shift. That will not be the case this time around, so the question remains just how bearish the FOMC outcome may be?"

"The scenarios around the median “dot plot” are, in order of hawkishness, a) a shift to 4 hikes in 2018 and an increase to the long term rate; b) a shift to 4 hikes in 2018, no change to the long term profile; c) 3 hikes for in 2018, but a shift higher in the long term rate; and d) no changes. The first two scenarios would likely see US 10yr yields build momentum for a push above 3%, while  the third scenario is only mildly bearish given current pricing. To the extent that recent mediocre data, and policymakers’ stated intention to tighten gradually,  makes the fourth scenario more than plausible also. That is not a bearish scenario given current levels."

"In Australian rates markets, the main focus is on the short end, as BBSW continues to set higher, in line with similar moves in US Libor. There is still a significant amount of debate around the causes of this link, and in this week’s chart essay we look further at some of the issues involved, including the high repo rates relative to OIS, forward indicators of the fixing, such as BOB spreads and curves, as well as providing a high level overview of the AU funding maturities."

"The AU-US 10yr spread will again come under scrutiny this week, with the cash differential finally moving inverse a strong symbolic indication that the current long end inversion can sustain its inverse and move more substantially inverse over coming months."