Australian Dollar Outlook: Fed Decision Rocks Currency Markets

AUSTRALIAN DOLLAR FORECAST: BEARISH

• The Australian Dollar sunk in the aftermath of the Fed’s rate rise
• The RBA has signaled a less hawkish approach to monetary policy
• The Fed’s jumbo hike has given USD some backbone. Will AUD/USD go lower?

The Australian Dollar appears captive to the machinations of the US Dollar for now.

The fallout from the Fed’s decision during the week has seen Treasury yields roar higher. This has seen the US Dollar strengthen across the board with the US Dollar index (DXY) jumping to a 20-year high.

The US central bank raised its Fed funds target rate by 75 basis points as anticipated during the week, but it was the post-decision press conference that got the hawks screeching.

Fed Chair Jerome Powell said, “we will keep at it until the job is done,” in reference to fighting sky-high inflation (8.3% year-on-year to the end of August). The market has now priced in another 125 basis points of lifts by the end of the year.

Conversely, the less hawkish stance of the RBA was confirmed during the week with the release of the RBA meeting minutes for the September meeting.

By in large, they re-iterated the opinion expressed recently by RBA Governor Philip Lowe that the RBA will be considering a hike of either 25 or 50 bp at their next meeting on 4th October.

He has also said that as rates become elevated, the case for further large boosts decreases. So, while rates are being tightened, they are being done so at a slower pace than the Fed and other global central banks.

This pace of reining in previously loose policy places the Aussie Dollar under pressure as yields in other developed markets rise.

The tightening of monetary policy is to allay fears of inflation becoming entrenched. The last read of year-on-year CPI to the end of the second quarter came in at 6.1%, well above the RBA’s target of 2-3% on average over the business cycle.

So, while price pressures are stronger than desired, they are not as pronounced as in other parts of the world, hence the less aggressive tightening stance.

2- and 10-year bond spread yields illustrate the relative outperformance of Treasuries to Australian Commonwealth Government Bonds (ACGB). With the RBA’s dovish tilt compared to Fed, the ‘big dollar’ continues to climb, pushing AUD/USD down.

AUD/USD AGAINST 2- AND 10-YEAR BOND SPREADS

Chart Created in TradingView

--- Written by Daniel McCarthy, Strategist for DailyFX.com

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