It’s going to be a whirlwind 24 hours for the Australian dollar

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The Australian dollar continued to push higher in overnight trade, benefiting from firmer commodity prices and thin market conditions ahead of key central bank monetary policy decisions that will arrive over the next 24 hours.

As at 8.20am AEST, the AUD/USD currently buys .7557, largely unchanged from Tuesday’s closing level.

AUD/USD Hourly Chart

While the Aussie has been on an upward trajectory in recent days, rising 1.5% from the lows seen on September 13, whether that trend continues today will be determined by key monetary policy announcements from the Bank of Japan and, later in the session, the US Federal Reserve.

“The Bank of Japan (BOJ) meeting is the only thing to watch in Asia and one can expect an announcement anytime between 12:00 pm AEST and 3pm AEST,” wrote Chris Weston, chief market strategist at IG Markets, in his morning note.

While the BOJ decision will create volatility across currency markets, not just for the Japanese yen but also for the Aussie, there is no certainty as to whether or not it will lead to a stronger or weaker yen, says Weston.

“In the FX market, USD/JPY is the pair to watch through Asia today with the options market showing implied overnight volatility spiking to an elevated 35.00,” he wrote, adding “the market is expecting a large move today”.

“There is a debate in the market around whether the BOJ take the deposit rate deeper into negative territory (from the current levels of -10bp) and even then it’s not clear if the JPY weakens or strengthens,” notes Weston.

On the BOJ’s QQE program, Weston suggests the bank “will try and create a sense of flexibility and move to a range of ¥70 trillion to ¥100 trillion and portray to the market that the level of bond buying will be conditional on them reaching their inflation targets”.

Given the influence the USD/JPY has on the broader US dollar index during the Asian trading session, the movements in the yen will likely dictate movements in the US dollar, hence those seen in the Aussie dollar in the immediate aftermath of the BOJ announcement whenever it arrives.

According to a poll conducted by Bloomberg, 23 of 43 economists forecast the Bank of Japan will ease monetary policy today.

After the BOJ decision hits in the second half of Asian trade, focus will quickly shift to the US Federal Reserve’s FOMC September monetary policy decision that will be released at 4am AEST on Thursday morning.

In the absence of a rate hike, something that most are forecasting won’t arrive at this meeting (markets have a 0.25% increase at around a one in five chance), all attention will be on the accompanying monetary policy statement, updated economic forecasts, including the expected pathway for the Fed funds rate expected by committee members, along with a press conference from US Fed chair, Janet Yellen, that will begin at 4.30am AEST.

David de Garis, senior economist at the NAB, believes that markets should look for the number of committee members that dissent against the rates decision, suggesting that there’s likely to be two, perhaps three, given hawkish remarks conveyed by some FOMC members in recent weeks.

As for the Fed fund rate projections offered by FOMC members, known in markets as “the dots”, movements in the US dollar will be determined by any change in expectations towards the longer-run outlook for interest rates. A significant downgrade to the longer-run Fed funds rate forecast will likely weigh on the US dollar should it eventuate. Conversely, an unchanged longer-term forecast will likely support the US dollar.

“It’s going to take something toward hawkishness from the Fed Chair’s presser to have the market even thinking whether its pricing that the Fed will only increase rates by 1-2 times between now and the end of 2017 is too thin,” says de Garis. “It’s hard to see Fed Chair Yellen, the Statement and the forecasts pointing to a more dovish outcome than that”.

Plenty to digest for investors on what will be a big day for markets.

Here’s the current Aussie dollar scoreboard.

  • AUD/USD 0.7557 , 0.0001 , 0.01%
  • AUD/JPY 76.85 , 0.01 , 0.01%
  • AUD/CNH 5.0497 , 0.0021 , 0.04%
  • AUD/EUR 0.6776 , 0.0002 , 0.03%
  • AUD/GBP 0.5818 , 0.0002 , 0.03%
  • AUD/NZD 1.0324 , -0.0004 , -0.04%