Aussie dollar hit by a double whammy

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The Australian dollar is trading below .80 cents this morning as it collapsed on the back of iron ore prices in Shanghai.

“But the Aussie dollar got a bigger hit from Reserve Bank of Australia (RBA) Governor Lowe’s statement yesterday,” said Greg McKenna, chief market strategist at CFD and FX provider AxiTrader.

“It was a double whammy for the Aussie as Governor Lowe’s statement was seen as less than hawkish,” he added.

According to McKenna, while it may be easy to explain the Aussie dollar’s move as a reaction to the heavy selling on metals, steel and iron ore yesterday, another reality is that the Aussie is under pressure as the US dollar gained some strength yesterday.

Regarding Governor Lowe’s statement, McKenna said what’s important for the Aussie dollar was how he (Governor Lowe) said the transmission mechanism of global rates would – or wouldn’t as may be the case – flow to Australia.

“A rise in global interest rates has no automatic implications for us here in Australia. Notwithstanding this, an increase in global interest rates would, over time, be expected to flow through to us, just as the lower interest rates have. Our flexible exchange rate though gives us considerable independence regarding the timing as to when this might happen” governor Lowe said.

“If I unpack that two things become clear,”

“First, he is saying that the trend to global rates will impact Australia but not necessarily straight away. Australian rates just didn’t fall as far as other nations so he can afford to wait and be patient,”

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But it’s the second point which is key for the Aussie dollar.

“My interpretation of Lowe’s speech is that he is saying the RBA might resist the trend to higher rates for as long as it can in order to encourage the Aussie dollar to fall. A counter argument is he could be saying if the Aussie dollar rises he won’t need to raise rates,” McKenna said.

Either way, McKenna believes “The RBA governor is warning interest rates and forex market traders not to get ahead of themselves when it comes to pricing RBA rate hikes.”

In other currencies, there were lots of moving parts in forex markets overnight. The overall synopsis is that within an overall more positive tone toward the US dollar individual currency pair events, news, and sentiment dominated this US news.

The Euro is higher this morning but off yesterday’s pre-FOMC highs. The Pound leapt as traders bet Theresa May is softening Brexit – It’s at 1.3577. USDJPY is above the 200-day moving average and sits at 1.1243. That’s about 30 points below the high.

“The Kiwi is down in sympathy with the Aussie dollar, and I think some concerns about a possible Greens/Labour coalition forming government at tomorrow’s election,” McKenna said.

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