AUD/USD poised to surge? Opportunities behind the Fed's liquidity injection

A recent interesting phenomenon has emerged in the financial markets: the Federal Reserve just lowered interest rates and then turned around to deploy liquidity injections. In the early morning of December 12, the Fed announced a 25 bps rate cut while launching the Reserve Management Purchase (RMP) plan, which will buy $40 billion in short-term government bonds over the next 30 days. This seemingly contradictory move actually hides a huge trading opportunity.

The Fed’s True Intent: Not QE, But Better Than QE

Many investors mistakenly believe that RMP is just traditional quantitative easing. In fact, there are fundamental differences between the two. QE mainly involves purchasing long-term government bonds and MBS to lower long-term interest rates and stimulate the economy. RMP, on the other hand, is more targeted, focusing on buying short-term government bonds, with the core goal of injecting liquidity into the financial system and preventing unexpected panic.

But here’s a key observation: buying short-term bonds is essentially injecting cash into the market. Although nominally not QE, the actual effect is very similar. After the announcement, the yield on the 2-year U.S. Treasury dropped significantly, indicating that the market understood the Fed’s true intent.

Michael Burry, the real-life figure behind the movie “The Big Short,” issued a warning, pointing out that the Fed’s restart of short-term government bond purchases highlights the fragility of the U.S. banking system. Even more noteworthy is that the U.S. Treasury has been issuing short-term debt to avoid pushing up the 10-year yield, and the Fed is coincidentally buying these short-term notes. This “coincidence” suggests coordination between the two to address systemic risks.

Inflation Expectations Behind Policy Divergence

The rate cut decision was approved by 9 votes in favor and 3 against, marking the first time in six years that three dissenting votes appeared. Kansas City Fed Chair Esther George and Chicago Fed President Goolsbee opposed the rate cut, advocating for maintaining rates, while Fed Board Member Mester supported a substantial 50 bps cut. The hawkish vs. dovish split fundamentally reflects differing judgments on inflation prospects.

The Fed’s dot plot shows policymakers expect only one more rate cut in 2026 and another in 2027, far below the market’s previous bets of two cuts. This indicates the Fed believes there is limited room for further rate cuts. Coupled with the launch of the RMP plan, a clear signal emerges: the Fed is preparing for inflation to rebound.

According to Australia’s latest CPI data, the overall consumer price index in November reached 3.8%, well above the Reserve Bank of Australia’s 2-3% target range. This is not an isolated phenomenon; global commodity prices are rising sharply—silver has surged past $64.3, up over 120% this year; the US dollar index has broken down after liquidity injections, and precious metals along with industrial metals are rising accordingly.

Reversal Signal in Commodities and Currencies

The Australian dollar has become the biggest beneficiary of this shift in inflation expectations. As the world’s largest iron ore producer and a major gold exporter, over 8% of Australia’s GDP comes from mining. When commodity prices rise, Australia’s export income increases accordingly, providing natural support for the commodity currency AUD.

On December 11, the Australian Bureau of Statistics released employment data showing a decrease of 21,300 jobs, with the unemployment rate remaining at 4.3%. A loosening labor market may prolong the RBA’s low interest rate stance, but RBA Governor Lowe has explicitly stated that the shortened rate-cut cycle is over. More critically, the RBA is now focusing on inflation control. If rising commodity prices push CPI higher, the likelihood of the RBA raising interest rates further from the current 3.6% baseline increases significantly. The market now expects the RBA to hike at the February 2026 meeting.

Compared to the Fed’s potential continued rate cuts or maintenance of low rates, the RBA’s reverse rate hikes create a strong upward momentum for AUD/USD.

Three Macro Environment Tailwinds

Beyond commodity prices and policy divergence, the Australian dollar also benefits from broader macro improvements. The Fed has revised up its GDP growth forecast for 2026 to 2.3%, reducing the risk of stagflation in the U.S. This provides a warm macro environment for risk assets.

More interestingly, the U.S. faces an “impossible trinity” dilemma. The current U.S. national debt exceeds $30 trillion for the first time, doubling in just seven years. Although the federal deficit for FY2025 has shrunk to $1.78 trillion due to tariff revenues, this is still far below hundreds of billions of dollars in annual interest payments. With debt issues hard to resolve, inflation effectively dilutes debt, posing a serious challenge to the dollar’s creditworthiness.

In this context, progress in U.S.-China trade issues is expected, further supporting the rebound of risk assets like Australia and providing macro support for the AUD.

Technical Outlook for AUD/USD: Targeting 0.6900

The weekly chart of AUD/USD shows that the pair, which previously consolidated around 0.6500, has now effectively broken through the 0.6600 level. The overall pattern indicates a strong bottoming formation, suggesting bullish market sentiment.

Key levels to watch are: 0.6550 as a medium-term support/resistance line. If AUD/USD can hold above 0.6600, it may further rebound to challenge the 0.6900 level. Combining macro fundamentals, policy divergence, and commodity trends, the upside potential for AUD/USD looks promising.