The Australian dollar has sunk to a multi-month low

Photo: Douanes Francaises/Getty Images
  • The Australian dollar has fallen to a three-month low, coming under pressure from a stronger greenback.
  • The AUD/USD has now lost over 5.5% since January 26.
  • All focus today will be on the US Fed’s interest rate decision that will arrive in the early hours of Thursday morning in Sydney.

The Australian dollar fell to a three-month low on Tuesday, weighed down by a resurgent greenback ahead of the US Federal Reserve’s interest rate decision on Thursday.

However, as seen in the scoreboard below as at 7.50am AEDT, the Aussie performed better against the crosses.

AUD/USD 0.7681 , -0.0036 , -0.47%
AUD/JPY 81.82 , -0.04 , -0.05%
AUD/CNH 4.8641 , -0.0121 , -0.25%
AUD/EUR 0.6273 , 0.0018 , 0.29%
AUD/GBP 0.5485 , -0.0017 , -0.31%
AUD/NZD 1.0696 , 0.0046 , 0.43%
AUD/CAD 1.0045 , -0.0043 , -0.43%

After starting the session at .7717, the AUD/USD meandered around the 77 cent level throughout the Asian session before rebounding to as high as .7721 midway through the European session.

However, as seen in the hourly chart below, those gains were reversed and then some in North American trade as the greenback began to strengthen.

AUD/USD Hourly Chart

The US dollar was supported by a lift in benchmark 10-year US government bond yields ahead of Wednesday’s FOMC rate decision, along with soft German investor sentiment and producer price inflation data which weighed upon the euro.

With interest rates, pre-positioning before the Fed and a softer euro all working in the US dollar’s favour, it saw the AUD/USD fall to .7679 — the lowest level since December 21.

It’s now fallen over 5.5% from the high of .8135 struck on January 26.

Against the crosses, the Aussie put in a mixed performance, rallying against the Kiwi dollar and euro but losing ground against the Loony.

The latter was supported by a surge in crude oil prices while the euro was undermined by weak German data released during the session. The slide in the Kiwi was a strange one, but the proximity to the RBNZ’s March monetary policy decision on Thursday morning may have been a factor.

Turning to the session ahead, it’s likely to be a quiet one ahead of the Fed interest rate decision that will arrive at 5am Sydney time on Thursday morning.

In Australia, markets will receive the latest Westpac-MI Leading Index, skilled vacancies data from the ABS and NAB Cashless Retail Sales Report for February during the session.

None appears likely to move the Aussie, although the latter does have a reasonable relationship to Australian retail sales data released by the ABS.

Outside of Australia, UK unemployment and public sector borrowing figures will be released alongside existing home sales data from the US.

However, they’ll likely play second fiddle to the US Federal Reserve’s FOMC interest rate decision that will arrive in the latter parts of the session.

A 25 basis point rate increase, taking the Fed funds rate to 1.5% to 1.75%, is all but baked into the cake, meaning the FOMC’s latest economic forecasts, along with Fed Chair Jerome Powell’s post-meeting press conference, are likely to dictate market movements following the rate decision.

In particular, forecasts offered by individual FOMC members on the outlook for the Fed funds rate, known as the “dots”, will be influential.

Markets are split on whether the median forecast for this year will be centered on three or four 25 basis point rate hikes arriving this year, as well as whether expectations for 2019 will also be revised higher.

“Our sense is that Fed probably won’t lift its 2018 dots enough to move the dial from three to four hikes but will almost certainly move the 2019 dots up enough to shift the median from 2 to 3 hikes,” says Rodrigo Catril, FX Strategist at the National Australia Bank.

“This should — on reflection if not immediately — support the USD and further pressure the AUD.”

Catril says markets will be closely watching for clues about the outlook for the economy, inflation and bias for more hikes in Powell’s post-meeting press conference.

“We think Powell will sound upbeat on the outlook, setting up the stage for the announcement of a fourth hike later in the year.”