After a resilient performance earlier in the week, the Australian dollar finally succumbed to rampant US dollar strength overnight, sliding sharply as expectations for a US interest rate hike in two weeks time scaled new heights.
As a result, the AUD/USD now sits at the lowest level since February 1, extending its decline from the high of .7741 of February 23 to over 2%.
Here’s the Australian dollar scoreboard as at 7.50am AEDT:
- AUD/USD 0.7571 , -0.0103 , -1.34%
- AUD/JPY 86.61 , -0.69 , -0.79%
- AUD/CNH 5.2133 , -0.0592 , -1.12%
- AUD/EUR 0.7205 , -0.0072 , -0.99%
- AUD/GBP 0.6173 , -0.007 , -1.12%
- AUD/NZD 1.0707 , -0.0036 , -0.34%
Richard Grace, chief currency strategist at the Commonwealth Bank, put the decline down to increased expectations for a US rate hike on March 15 due to strength in US economic data and continued hawkish remarks from US Federal Reserve officials.
“The USD has demonstrated broad-based strength overnight as the markets further priced the likelihood the Fed will raise interest rates 25bpts at the March 15 FOMC meeting,” he said.
“Fed fund futures are now pricing a 90% chance the Fed will raise interest rates at the March meeting, up from 80% yesterday.
“Better than expected US weekly jobless claims — falling to the lowest level in 44 years last week — and additional bullish comments from Fed President Lael Brainard supporting the case for an interest rates rise ‘soon’ lifted the US yield curve.”
That saw US 2-year and 10-year bond yields lift 4 basis points to 1.33% and 2.49% respectively in overnight trade, putting a rocket under the US dollar and sending its Aussie counterpart hurtling lower.
Grace added weakness in commodity prices, along with a smaller-than-expected Australian trade surplus in January, also contributed to the weakness in the Aussie.
“The overnight downward pressure on AUD was aggravated because Australia’s January trade surplus unexpectedly slumped from $3.3 billion to only $1.3 billion, he said.
“AUD showed broad-based fall against the major currencies as the current account surplus prospects were-priced out, and as Asian currencies declined.”
Despite the recent weakness, Grace suggests that traders shouldn’t get “too bearish” towards the Aussie, pointing to a strengthening global economy, still-high commodity prices, the likelihood of stronger economic growth in Australia and a continued narrowing in the nation’s current account deficit.
Whether the weakness in the Aussie extends on Friday will likely come down to sentiment towards the US interest rate outlook, something that will almost certainly be dictated by major economic data releases along with a key speeches from several US Federal Reserve officials — including chair Janet Yellen — during today’s session.
“Ahead of the pre-FOMC hiatus starting next week, Fed Mester is on the roster this morning followed by Fed Evans and Fed Powell tonight, culminating with Fed Vice Fisher and Chair Yellen early Saturday morning, Sydney time,” says Rodrigo Catril, currency strategist at the NAB.
“An affirmation by the latter two that a March hike is very much on the cards will confirm the consensus view that a soft non payrolls report next week is the only data release likely to stop the Fed from hiking this month,” he added.
Aside from Fed-speak, markets will also receive the US ISM’s non-manufacturing PMI later in the session, with most interest likely to fall on the survey’s employment measure one week before the release of February’s crucial non-farm payrolls report.
Before that event arrives, markets will also receive a swathe of services PMI reports from Asia and Europe, including from Australia, as well as CPI and employment data from Japan.
The Australian performance of services index (PSI) from the Ai Group — released at 9.30am AEDT — may get more attention than usual after the group’s manufacturing PMI releases showed activity levels across that sector jumped to a 15-year high in February.