The Australian dollar was knocked back to the .7654 level as the US dollar gained some strength overnight.
“We saw more signs that the US Fed is likely to raise rates this month,” said Greg McKenna, chief market strategist at CFD and forex provider, AxiTrader.
“And that’s not good for the Aussie,” he added.
According to McKenna, if the Fed’s rate hike is on track, “It is an important point for the Aussie because it is the Fed’s tightening cycle that the RBA and many Aussie forecasters have been relying on to temper the Aussie’s rally.”
He added that the sudden confidence in the dollar has knocked the Australian dollar down to 0.7654 – the lowest level since February 21.
This leaves the Australian dollar vulnerable today on many fronts ahead of reactions to policy divergence and President Trump’s address to the US congress.
The US recently had a lower than expected GDP but talks are still around that a Fed hike is on the table for March.
According to McKenna, “Two prominent Fed presidents have been speaking to reinforce the recent message that March really is a live meeting.”
He added, “San Francisco Fed president John Williams said that a March rate hike is up for “serious consideration” and noted that rates in the US are abnormally low.”
These remarks have significantly affected the market on the Fed hike.
According to McKenna, “The impact is to have materially moved the needle on interest rate futures pricing of a march rate hike which has now risen to 72%.”
“That’s important for forex levels against the US dollar in general and the Australian dollar in particular because of interest rate differentials, and central bank policy divergence matter.”
In a recent statement, RBA Governor Philip Lowe implied that the RBA is in no hurry to raise rates anytime soon given the Australian economy’s economic fragility.
Even with the positives stacking, there is the need to kick it up a bit by lowering interest rates but that just cannot happen given its possible adverse effects on the housing market.
“What follows for forex traders is that as the Fed tightens – likely three times maybe four – in 2016 the spread between owning Australian and US debt will close in favour of the US dollar,” McKenna said
While investor risk appetite, the commodity price rally, and global reflation have helped the Aussie dollar, a closing in rate differentials – particularly where that also strengthens the US dollar, weighs on the Aussie.
“The chances of a move lower – below 76 cents – are growing if the Fed is hell bent of hiking rates,” warned McKenna.
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