The Australian dollar is looking good as rate cut bets are pulled

Derek Zoolander, blue steel exporter. Source: Village Roadshow.

Despite weakness across the commodities complex, especially in crude and iron ore, the Australian dollar managed to cling onto most of it’s post jobs gains overnight, trading in a relatively large range between .7083 to .7151 throughout European and US trade.

Richard Grace, chief currency and rates strategist at the CBA, believes reduced expectations for further interest rate cuts ensured the Aussie held its earlier gains despite weakness in commodity prices.

“AUD/USD has held onto most of its gains overnight and remains up on the cross rates, despite lower commodity prices,” wrote Grace in his morning note.

“Many of the industrial commodity prices have moved to fresh cyclical lows. The resilience in AUD reflects yesterday’s strong Australian October employment report, and subsequent adjustment in RBA interest rate expectations. Overall, the labour market developments are consistent with the RBA’s view that Australia’s unemployment rate may have peaked and further reduces the risk of more RBA rate cuts.”

Reflecting the reduced risk that interest rates will move lower, markets have also scaled back expectations for additional policy easing.

“The Australian OIS market has all but removed the risk of a December RBA rate cut and has watered down expectations across the curve, totally removing the 100% probability of a 25bps RBA rate cut. The terminal rate priced in by the 30-day interbank futures market is now 1.82%, up from 1.66% a week ago,” notes Grace.

As at 8.30am AEDT, the AUD/USD currently buys .7124, sharply higher than Thursday’s opening level of .7058.

AUD/USD 5-minute chart Source:

Grace believes that wider interest rate differentials between Australia and the US will provide short term support for the Aussie, suggesting there is scope for the currency to lift and test resistance between .7200-.7250 over the short term.

With nothing of note on the domestic or regional economic calendar today, markets will be looking to events in the US to drive the Aussie’s direction. At 10am AEDT Stanley Fischer, vice chair of the US Federal Reserve’s FOMC, will speak while later this evening US retail sales for October will also be released.

Here’s the current Aussie dollar scoreboard.

  • AUD/USD 0.7124 , 0.0066 , 0.94%
  • AUD/JPY 87.3 , 0.61 , 0.70%
  • AUD/CNY 4.5373 , 0.0433 , 0.96%
  • AUD/EUR 0.6585 , 0.0016 , 0.24%
  • AUD/GBP 0.4676 , 0.0038 , 0.82%
  • AUD/NZD 1.0885 , 0.0131 , 1.22%

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