The Australian dollar suffered one of its largest declines of the year on Wednesday, dragged lower by broad-based US dollar strength and, as a consequence, sharply lower commodity prices.
Richard Grace, chief currency and rates strategist and head of international economics at the CBA, notes that hawkish commentary from several US Federal Reserve policymakers led to renewed strength in the US dollar, weighing on the Aussie as a consequence.
“USD has strengthened overnight as Fed Presidents, James Bullard, Patrick Harker and Charles Evans provided somewhat hawkish comments about the need for Fed rate hikes this year,” wrote Grace in his morning report. “Only James Bullard is a FOMC voter this year, but he stated ‘you could probably make a case for moving in April’.”
As a consequence, Grace suggests that the stronger US dollar placed pressure on commodity prices, particularly crude oil following a significantly larger US inventory build than what markets had expected.
In combination, it ensured the Aussie finished sharply lower, closing New York trade buying .7528 against the US dollar, representing a decline of 1.2%. It was the fourth largest percentage decline seen this year.
As this tweet from IG Markets chief market strategist Chris Weston suggests, the scale of the reversal has some questioning whether the Aussie’s rally — something that has seen it rise more than 10% against the US dollar since mid-January — has come to an end.
AUD/USD – 4th biggest sell off this year.. bearish reversal, with MACD cross..Good USD inflows in general..AUD/USD had tis time in the sun??
— Chris Weston (@ChrisWeston_IG) March 23, 2016
Looking ahead to Thursday’s trading session, there is next to no market moving data from a domestic or regional perspective. If anything, the People’s Bank of China’s USD/CNY fix shortly after 12.15pm AEDT will likely produce the most volatility during the session.
Given the US dollar strength seen on Wednesday, a significantly weaker yuan fix may support US dollar strength even further.
Here’s the Aussie dollar scoreboard as at 8.10am AEDT.
- AUD/USD 0.7529 , 0.0001 , 0.01%
- AUD/JPY 84.6 , 0.02 , 0.02%
- AUD/CNH 4.8997 , 0.0008 , 0.02%
- AUD/EUR 0.6733 , 0.0003 , 0.04%
- AUD/GBP 0.5333 , 0.0001 , 0.02%
- AUD/NZD 1.1224 , 0.001 , 0.09%