The Australian dollar roars back above 76 cents

The Australian dollar rose strongly in overnight trade, rallying more than one per cent following cautious remarks from US Federal Reserve chair Janet Yellen in a speech delivered to the Economic Club of New York overnight.

Here’s Rodrigo Catril, currency strategist at the NAB, on the key details of Yellen’s speech.

Yellen has reiterated her views that it is appropriate for the Fed to “proceed cautiously” in raising interest rates given the current uncertain global economic and financial environment, arguing that the need for caution was “especially warranted because, with the federal funds rate so low, the FOMC’s ability to use conventional monetary policy to respond to economic disturbances is asymmetric.”

Yellen, also said that the Fed needed to take into account the “the potential fallout from recent global economic and financial developments, which have been marked by bouts of turbulence since the turn of the year”. On this point she noted that the recent decline in market expectations for interest rate increases effectively worked as an “automatic stabilizer”, cushioning the US economy from these turbulences.

As for risks to the outlook, the Fed chair highlighted China’s slowing growth and commodity prices, particularly oil. Noting that further declines in oil could have “adverse” effects on the global economy.

To Catril, Yellen’s cautious approach completely overrode recent hawkish messages from other Fed speakers in recent weeks, helping to spur gains in US treasuries and stocks to the detriment of the US dollar.

“In currencies, the US dollar is weaker across the board,” said Catril. “The US dollar index is down just under 1% on the day and month to date is -3.1%.”

The US dollar weakness, a consequence of lowered expectations for US interest rate increases in the year ahead, saw the Australian dollar explode higher, rallying to as high as .7645 before easing into the New York close.

Improved investor risk appetite, widening interest rate differentials between Australia and the US and a bout of short covering helped to propel the Aussie’s gains.

Currently the AUD/USD buys .7624, up 1.1% on Monday’s closing level.

AUD/USD 5-Minute Chart

On the data front there is next to no market moving data scheduled on Wednesday, either domestically or regionally. This suggests that investor risk appetite, along with the Chinese yuan fix from the People’s Bank of China at 12.15pm AEDT, will likely drive movements in the Australian dollar.

End of quarter “window dressing” may also be a factor to watch out for, particularly given the strength in the Aussie during the March quarter,

Here’s the current Australian dollar scoreboard in early Asian trade.

  • AUD/USD 0.7624 , -0.0001 , -0.01%
  • AUD/JPY 85.88 , -0.04 , -0.05%
  • AUD/CNH 4.9487 , -0.0013 , -0.03%
  • AUD/EUR 0.6751 , -0.0001 , -0.01%
  • AUD/GBP 0.5299 , 0 , 0.00%
  • AUD/NZD 1.1123 , 0.0003 , 0.03%

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