drivers of price action
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- Nov, 19 Yen Finds Support On Flight To Safety, Ahead Of BoJ Rate Decision
- Nov, 18 Canadian Dollar Range Bound As Oil Remains Capped
- Nov, 17 Pound Strength May Continue If Inflation Data Fuels Interest Rate Expectations
- Nov, 16 Euro Supported As Equity Markets Soar, Is It Sustainable?
- Nov, 13 Yen Becomes Increasingly Vulnerable As Risk Appetite Grows
- Nov, 11 New Zealand Dollar At Risk If Commodities Start To Lose Favor
- Nov, 10 Pound May Plot New Direction If Inflation Report Influences BoE
- Nov, 09 Euro Driven Higher By Soaring Equity Markets
- Nov, 05 Yen Looks To Regain Status As Top Funding Currency From Dollar
- Nov, 03 Euro Following Equity Markets Lower, ECB Rate Decision To Impact Direction
- Nov, 02 Pound Remains Directionless With BoE Meeting Ahead
- Oct, 30 Canadian Dollar Slumps Following Oil’s Lead
- Oct, 28 Euro Weakness May Continue, If US GDP Figures Fail To Revive Risk Appetite.
- Oct, 27 Pound’s Direction to Come from BoE Meeting, Credit Report Will Provide Insight
- Oct, 23 New Zealand Dollar Strength May Continue With A Potential RBNZ Rate Hike Looming.
- Oct, 22 Euro and Dow Challenge Psychological Barriers, Will The Rally End?
- Oct, 21 Canadian Dollar Soars On Higher Oil, But Will Crude Run Out Of Steam?
- Oct, 20 Pound Starting to Take Its Cue From Interest Rate Expectations, Will BoE End QE?
- Oct, 16 Will A Pullback In Equities Sink The Euro?
The Australian dollar has regained its footing after seeing weakness following the RBA rate decision. Policy Makers lowered expectations for further rate hikes after meeting market’s expectations with a 25 bps rise in their target rate.
AUD/USD
The Australian dollar has regained its footing after seeing weakness following the RBA rate decision. Policy Makers lowered expectations for further rate hikes after meeting market’s expectations with a 25 bps rise in their target rate. Interest rate expectations have started to grow in influence since the central bank began its tightening policy currently explaining 33% of price action. However, commodity prices remain the primary driver of direction for the AUD/USD with a 76% correlation and their recent bounce from support may continue to provide support for the pair.
RBA Interest Rate Expectations
Overnight Index Swaps are currently pricing in 158 bps of rate hikes by the RBA over the next twelve months which is significantly lower than the 216 bps that we saw on October 20th. The central bank as expected raised their target rate by 25 bps which accounts for some of the decline in future expectations. However, Governor Stevens was surprisingly dovish in his post decision remarks citing the local dollar’s march toward parity against the greenback as cause to slow the pace of tightening. The strength of the Australian dollar will keep inflationary pressures at bay allowing policy makers to take a more measured approach in future monetary policy. Therefore, the lower yield expectations could become a weighing factor for the AUD/USD heading into 2010 as a rate hold in December would pause further tightening until February, the first meeting of the new year.
FOMC Interest Rate Expectations
The FOMC left their benchmark rate unchanged at 0.25% today and stated that they will keep rates “exceptionally low” for an extended period. It has become clear that the central bank will most likely wait until mid-2010 before considering tightening which should keep the greenback’s negative correlation to risk sentiment intact. Overnight index swaps are currently pricing in 82 bps of rate hikes over the next year which is sharply lower from its peak of 134 bps on August 10th. We could continue to see the dollar lose ground against its counterpart from down under as their yield differential continues to increase.
Commodities
Commodity prices are marching higher again after finding support, concerns over the sustainability of the global recovery previously sapped demand for raw materials. However, Warren Buffet going all in on railroad Burlington Northern Santa Fe and an unexpected drop in U.S. oil and gasoline inventories helped reignite bullish sentiment. The Reuters/Jefferies CRB broke from its recent range where it was finding support from the 38.2% Fibo retracement of the 249-285 rally. The failure to break below the significant technical level is a sign that broader optimism remain for the global economy and that more upside may be ahead. Therefore, we could see the Australian dollar continue to track the basket of 19 commodities higher .
To discuss this report or be added to the email list contact John Rivera, Currency Analyst: jrivera@fxcm.com
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