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Australian Dollar Volatility Risk Remains Amid Thin Liquidity

Australian Dollar Volatility Risk Remains Amid Thin Liquidity

2015-12-19 16:40:00
Ilya Spivak, Head Strategist, APAC
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Australian Dollar Volatility Risk Remains Amid Thin Liquidity

Fundamental Forecast for the Australian Dollar: Neutral

  • Australian Dollar Lacking for Discrete Drivers After Fed Rate Hike
  • Thin Liquidity in Pre-Holiday Trade May Amplify Knee-Jerk Volatility
  • Find Key Turning Points for the Australian Dollar with DailyFX SSI

The Australian Dollar faced selling pressure last week as expected, with prices dropping to their lowest in a month against the greenback. The Aussie’s slump was matched by a drop in share prices as risk sentiment soured in the days following the FOMC monetary policy announcement, where Chair Yellen and company issued the first post-QE increase in the benchmark lending rate. The S&P 500 – a benchmark for global risk appetite – ended the week with the weakest close since mid-October.

Looking ahead, the currency finds itself without readily apparent catalysts. The homegrown economic calendar offers next to nothing by way of noteworthy event risk. On the external side of the equation, the US data docket features a handful of upper-tier releases including updated third-quarter GDP figures and the Durable Goods Orders report.

Absent wild deviations from expectations however, these seem unlikely to trigger a strong response from price action. The figures’ market-moving potential would come from their implications for the timing of the Fed’s next rate hike following last week’s liftoff, and it seems unlikely that traders are prepared to commit to a directional bias on this front so close to the turn of calendar year.

On balance, this may make for quiet, consolidative trade as liquidity continues to thin out ahead of the Christmas holiday in most of the world’s largest financial markets. It ought to be noted however that the drop in participation may amplify knee-jerk volatility in the event that unexpected headline risk catches markets unprepared. In fact, last week’s BOJ rate decision was a case in point. With that in mind, traders would be wise to tread carefully despite apparent calm.

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