Traders are likely to pivot back to the AUD if more clarity is gained on the timing of the Reserve Bank of Australia’s next rate hike. Last week the central bank indicated that the likelihood of a hike has accelerated due to accelerating core inflation, and overnight-indexed swaps already have an increase of almost 50 basis points priced in by June. However, this scenario is speculative – fresh data is a long way off.
Yellen’s message sparked immediate action among FX market participants, with the implied probability of a rate hike rising to 90.6%. At the time, futures markets had priced in a 25% chance of a rise next year. As such, the AUD fell immediately following the Fed’s statement. It fell against the USD by about 0.5% after Yellen’s remarks.
Commodity prices also affect the Australian economy, as they account for a large proportion of exports. An increase in the price of iron ore, for example, would require higher prices for Australian exports. In turn, this would increase demand for Australian dollars and, therefore, appreciate the Australian dollar. This could be a good thing for investors. The AUD is currently under-appreciated, and this could be a sign that a downturn is on the way.
While Australian commodities are being exported at a higher rate, the price of Australian goods has been steadily increasing. This suggests that a further increase in export values is not far off. However, the CPI has not yet caught up to current conditions. Additionally, Australia is currently in the middle of a federal election campaign and both major parties are looking to impress with their economic management credentials. Neither has been funding the Australian Bureau of Statistics, which produces quarterly data.
Despite these factors, the USD continues to perform well and has ended the week with a bullish outlook. Even though the USD remains on a strong footing, Trump’s anti-trade stance is likely to increase uncertainty in the short term. In addition to this, the Fed’s policy makers have not yet announced a rate hike in December. And with uncertainty about the future of trade with China and the EU, the risk of instability could rise.