Talking Points:
- Aussie Dollar drops as RBA monetary policy announcement nears
- RBNZ may disappoint those looking for interest rate hike foundation
- Thin economic data docket keeps the spotlight on Washington, DC
The Australian Dollar fell after a soft retail sales report. What might have passed as a routine swing in a volatile series seemed to be a good enough excuse for a pullback after the currency hit a two-month high last. The on-coming RBA rate decision may have accounted for investors' cautious disposition.
The central bank is widely expected to stay its hand for now but the tone of the accompanying statement may remain cautious despite recently upbeat economic data and three consecutive quarters of firming inflation. This may highlight the extent to which global policymakers are held hostage but US fiscal uncertainty.
The US Dollar is the medium of exchange for close to 80 percent of global transactions (according to the BIS). This means that if the Fed raises borrowing costs, lending conditions are likely to tighten worldwide. For its' part, the FOMC's next move is heavily dependent on of what comes out of the White House.
The RBNZ might similarly disappoint the hawks. Where the RBA is seen in wait-and-see mode, Graeme Wheeler and company are projected to hike rates at least once over the coming 12 months. That expectation may fizzle if officials seem to have their hands tied by global instability, hurting the Kiwi Dollar.
Needless to say, this conundrum is hardly unique to Australia and New Zealand, meaning that news-flow from Washington, DC is set to remain at the forefront. This elevates erratic volatility risk and may invariably give way to blanket risk aversion as traders back away from an unusually clouded landscape until greater clarity emerges.
--- Written by Ilya Spivak, Currency Strategist for DailyFX.com
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