Australian dollar falls heavily, and there's likely more to come

Photo by Mark Kolbe/Getty Images

The Australian dollar endured a wild session overnight falling from a high of .7159 to as low as .7077 before recovering into the New York close. At 8.30am AEDT, the AUD/USD buys .7104, well below Wednesday’s opening level of .7188.

The catalyst for the wild price action was the release of the US Federal Reserve’s FOMC October policy statement, which suggested the Fed have not given up the hope of raising interest rates at its December meeting.

The removal of the line “recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term” from the Fed statement, suggested they are no longer as concerned about growth prospects for the global economy as they were in September.

The committee also laid the foundation for a rate hike at the December 15-16 meeting, stating that “in determining whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2% inflation.”

That was a noticeable alteration to September’s statement in which it noted “in determining how long to maintain this target range, the Committee will assess progress–both realized and expected–toward its objectives of maximum employment and 2 percent inflation.”

AUD/USD 5-Minute Chart

The change in tone from the FOMC, more hawkish than markets expected, had a pronounced effect on the Australian dollar, seeing the AUD/USD drop by close to a full cent in the 20 minutes following the release of FOMC statement.

“Weaker overnight commodity prices, oil prices excluded, also added downside pressure to the AUD,” wrote Elias Haddad, senior FX strategist in his morning note.

“The more benign Australian Q3 inflation outcome yesterday combined with today‚Äôs more hawkish FOMC statement narrowed Australia-US 2-year swap rate differentials the most since early September.”

According to Haddad, the combination of lower commodity prices and narrowing interest rate differentials could see further downside for the Aussie in the hours ahead, suggesting that the AUD/USD “risks declining to .7000 over the next 24 hours.”

Looking ahead to today’s Asian trading session, the economic calendar is light with Australian Q3 terms of trade and the preliminary reading of Japanese industrial production for September the only releases of note.

Here’s the current Aussie dollar scoreboard.

  • AUD/USD 0.7104 , -0.0011 , -0.15%
  • AUD/JPY 85.99 , -0.14 , -0.16%
  • AUD/CNY 4.5173 , -0.007 , -0.15%
  • AUD/EUR 0.6503 , -0.0012 , -0.18%
  • AUD/GBP 0.4651 , -0.0011 , -0.24%
  • AUD/NZD 1.0597 , -0.0013 , -0.12%

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