The Australian dollar broke through the top of its recent range on the back of some Chinese data and a weak US dollar.
“As that US dollar weakness intensified, the Aussie dollar pushed up to 76 cents and then ultimately to an overnight high of 0.7535,” said Greg McKenna, chief market strategist at CFD and FX provider AxiTrader.
But with the US Federal Reserve coming out more hawkish than expected, the US dollar regained some strength.
“That’s driven the Aussie dollar back to 0.7586 this morning. Still above the break. But well off the highs,” McKenna said.
According to McKenna, the US Fed was unequivocally hawkish.
“The takeaway from the decision last night is that chair Yellen and her colleagues have lowered their expectation for the unemployment rate in 2018 from 4.5% to 4.2%, increased their economic growth rate to 2.2%, and signalled they are looking through the dip in inflation.”
As a result, the Fed signalled that it is not to be swayed from the path of raising rates and reducing the size – tapering – of its balance sheet. Another hike is expected in 2017 and possibly 4 more in 2018 – as well as the balance sheet shift.
That is in stark contrast to what foreign exchange markets thought in the lead up to the meeting. Markets were looking for a dovish hike but instead got a clear hawkish hike.
At the moment, McKenna said the Aussie’s direction relies on the outlook for the US dollar.
“If you look closely, the other drivers of the Aussie dollar – e.g. commodity prices and interest rate differentials – are still painting a lower Aussie,”
“This means the Aussie still lacks the support from other drivers that usually propel it higher.”
However, looking at some technical data, McKenna said the Aussie is enjoying support around the .7566 level.
“That level is going to be very important today as traders await the release of the May jobs report this morning,” he said.
The market is currently looking for a print of +10,000 and an unemployment rate of 5.7%. The RBA has told us – via the May meeting minutes – not to worry about the full-time/part-time split.
He added: “But traders are likely to still look at this as an indicator of the underlying strength of the jobs market.”
And that’s important because there are real and growing concerns about Australia’s household sector. Solid jobs growth will go a long way to assuage those fears.
“But if we see a weak number today the Aussie will come under pressure and the focus will shift to the recent range bottom at 0.7515/20,” McKenna said.
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