Australian Dollar Remains Sideways As Commodities Look For Direction

AUD/USD

The Australian dollar continues to trade sideways taking its cue from consolidating commodities. The prices of raw materials continue to be the main driver of price action for the AUD/USD as they currently hold a 72% correlation. The RBA continues to raise interest rates which has also been a supporting factor for the Aussie increasing its significance in determining price direction. However, following three successive months of tightening the outlook has started to diminish which could see its influence dissipate.

RBA Interest Rate Expectations

The RBA raised its target rate for an unprecedented third time as they look to stem off potential inflation as the economy continues to show signs of growth. The quarter point increase brings the overnight rate to 3.75% maintain the Australian dollar’s status as a high yielder. Therefore, as long as risk appetite remains robust the commodity dollar should continue to benefit. Governor Stevens following the policy change deemed the board’s “material adjustments” sufficient to keep inflation within the central bank’s 2%-3% target range which may be a signal that the central bank will slow its pace of tightening. The outlook for further tightening has diminished with Overnight index swaps now pricing in 102 bps with of rate hikes compared with 216 bps on 10/20. Nevertheless, it remains a more aggressive outlook then we are seeing in the other majors. To discuss this and trading ideas join the AUD/USD forum.

FOMC Interest Rate Expectations

U.S. interest expectations have started to rise again on the back of the stronger than expected Non-farm payroll report. The U.S. economy only lost 11K jobs in November compared with expectations for a drop of 125K. However, Ben Bernanke told U.S. lawmakers yesterday that the central bank expects the unemployment rate to fall slowly over the next few years. Therefore, expectations are that policy makers will refrain from withdrawing liquidly from the market until job growth reapers on a consistent basis. Fed fund futures contimue to see little chance of a rate hike by March with only a 18% chance being priced in.

Commodities

Commodities continue to consolidate which could foretell of a potential breakout as is often the case following dense price action. The question is in what direction, today’s improvement in the U.S. labor market makes a case for an upside move, but with unemployment at 10% there is still consumption concerns. Meanwhile, Chinese growth which helped fuel the recent rally is holding steady but concerns over potential bubbles in the Asian giant has markets leery of projecting the current trend too far out. To discuss this and other fundamental data join the Economics Forum.

To discuss this report or be added to the email list contact John Rivera, Currency Analyst: jrivera@fxcm.com