The Australian dollar could be in for a tough ride this week as the US Fed and the Bank of Japan (BOJ) are due to release their decision on interest rates.
At the open of trade this morning the Aussie dollar is sitting at 0.7475 after trading a fairly benign 1 cent range last week of 0.7539-0.7439.
It’s all about central banks.
“Forex markets are going to be all about central banks this week,” said Greg McKenna, chief market strategist at CFD and FX provider AxiTrader.
“And while the BoJ remains uncertain because of its “comprehensive review”, and even though the US Fed is expected to leave rates on hold, the risk of market instability is high,” McKenna added.
“That in itself is enough to weigh on the Australian dollar.”
So while the Aussie is at 0.7475 this morning, which is around 40 points lower than this time Friday when it was happily back above 75 cents it’s actually a spectacularly strong performance.
According to McKenna, the Aussie has even managed to defy the Kiwi parity party crowd with this little bit of strength and a climb of last week’s low.
He pointed out that the key outlook for the Aussie dollar revolves around the US Fed and what it does, says, and of course how the markets react in the lead up too, and then aftermath, of these meetings.
What’s the Fed’s next move?
To that end it’s worth noting that the CPI release for August on Friday night reinforced to traders that even though the Fed is not expected to tighten this week it’s still highly likely that we see what might be considered a hawkish pass.
That is where rates are left on hold, we see a couple of dissenters to that motion, a strong statement suggesting a rate hike in December and a dot plot that suggests a series of rate hike in 2017 even if it’s a shallow rate cycle overall.
“My own view is the Fed should take the opposite approach and conduct a dovish rate rise where they move policy up a notch but say it will be a shallow cycle. I believe they should do that to wrest back control from the markets. But I am one out on this so it’s a very low probability,” McKenna said.
He added that naturally no move by from the Fed and a dovish dot plot or statement will see the US dollar undermined, risk appetite – and stocks – surge, bonds rally and the Australian dollar and other commodity currencies rise strongly.
That scenario would take the AUDUSD back toward 76 cents, perhaps 77 cents.
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