The Australian dollar surges as doubts about Fed rate hikes resurface

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  • The Australian dollar surged on Wednesday, logging strong gains against most major currencies.
  • Cautious remarks from Fed Chair Jerome Powell created fresh doubt about the pace of rate hikes from the US Federal Reserve next year, seeing US bond yields slide and leaving the US dollar sharply lower.
  • The economic calendar is stacked today with first-tier releases, including in Australia.

The Australian dollar surged on Wednesday as doubts about the pace of rate hikes from the US Federal Reserve resurfaced.

Here’s the scoreboard at 8am in Sydney on Thursday.

AUD/USD 0.7309 , 0.0086 , 1.19%
AUD/JPY 83.03 , 0.85 , 1.03%
AUD/CNH 5.0714 , 0.0507 , 1.01%
AUD/EUR 0.6428 , 0.003 , 0.47%
AUD/GBP 0.5697 , 0.0033 , 0.58%
AUD/NZD 1.0633 , -0.0005 , -0.05%
AUD/CAD 0.9698 , 0.0096 , 1.00%

After doing very little for the majority of the session, the AUD/USD jackknifed higher in North American trade, fueled by remarks from US Federal Reserve Chair Jerome Powell that raised fresh doubts about just how many rate hikes the Fed may deliver next year.

“Powell said interest rates are ‘just below the broad range of estimates of the level that would be neutral for the economy’,” said Richard Grace, Chief Currency Strategist at the Commonwealth Bank.

The neutral level for interest rates is the point where they don’t add or detract to economic activity. In October, Powell suggested the Fed funds rate was a “long way” from being neutral.

Powell also acknowledged that “the economic effects of our gradual rate increases are uncertain, and may take a year or more to be fully realised,” adding to speculation as to whether the Fed will deliver three rate increases next year as the median FOMC forecast suggested in September.

Powell’s remarks saw the US dollar slump against all major currencies, especially those in emerging markets as well as the Australian and New Zealand dollars. A sharp drop in US 2-year bond yields, which fell from 2.843% to as low as 2.797% in response to the remarks, helps fuel the weakness in the greenback.

There was little reaction to US economic data released during the session, including the second reading of Q3 GDP which rose at a seasonally-adjusted annual rate of 3.5%, unchanged form the initial estimate.

Investing.comAUD/USD Hourly Chart

Turning to the day ahead, sentiment looks set to remain in the driving seat yet despite the release of first-tier economic data.

In Australia, focus will be the release of Q3 private capital expenditure figures at 11.30am AEDT, proving the latest input that will flow into Australia’s Q3 GDP report next week.

After some disappointing readings on retail and construction spending for the quarter, economists expect the news to be a lot better in terms of business investment.

This 10-second guide has more on what to expect.

In New Zealand, the latest ANZ business confidence report for November will also be released at 11am AEDT. This carries the potential to generate significant volatility in the New Zealand dollar given the RBNZ has cited recent weakness in business confidence as one reason to leave interest rates unchanged over the next couple of years.

Later in the session, the main highlights will be French Q3 GDP, German unemployment and inflation, UK consumer credit, Eurozone consumer confidence along with personal spending and incomes data, including core PCE inflation (the Fed’s preferred inflation measure), pending home sales and jobless claims from the United States.

The minutes of the Fed’s November monetary policy meeting will also be released at 6am AEDT, providing another event that could spark volatility in financial markets.

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