With a lack of appetite for risk-correlated assets, thanks to volatile global equity markets and commodity prices, the Australian Dollar softened versus most of its peers overnight. Heightened expectations of Reserve Bank of Australia (RBA) intervention at the next available opportunity also continues to limit the appeal of the ‘Aussie’ (AUD).
As explained above, damp market sentiment has weighed heavily on demand for the ‘Aussie’. Overnight, the AUD USD exchange rate held losses despite an absence of US data to provoke movement. Market analyst Richard Perry wrote;
‘The recent recovery in risk appetite which saw equity markets pulling higher, Treasury yields bouncing and safer havens correcting seems to be starting to show signs of stalling. The driver seems to be a stronger Dollar in the last few days, with the Dollar Index breaking out to its highest level since early March.’
The Australian Dollar also continues to struggle amid expectations that RBA policymakers will ease outlook to combat AUD overvaluation. The publication of minutes pertaining to the most recent RBA policy decision showed that there was a lack of confidence in domestic growth. The minutes also hinted strongly that policymakers’ will likely call for another rate cut before year-end.
This morning, the Australian Dollar may see volatility in response to second-quarter Business Confidence data. However, with market sentiment the dominant force behind currency movement of late, the domestic data may not be hugely impactful.
In contrast to that of the performance of the Australian Dollar, the US Dollar strengthened considerably in response to risk-off trade. In a strange situation, dampened market sentiment has been linked to a stronger US Dollar, which has strengthened in response to risk-off trade.
One of the major reasons for the US Dollar’s upside bias has been a succession of positive domestic ecostats. This has doubled market odds that the Federal Reserve will hike the benchmark rate again this year. Writing for Reuters, Dion Rabouin stated;
‘The Dollar has benefited in recent weeks from data showing strength in the US labour market and inflation that has bolstered expectations the Federal Reserve may raise rates before the end of the year. Fed funds futures rates point to investors seeing about a 46 percent chance the Fed will raise interest rates by its December meeting, according to CME Group’s FedWatch tool, compared with less than 20 percent a few weeks ago. Expectations of a Fed increase come as other major central banks around the world gear up to ease monetary policy.’
However, there are several analysts that believe that the Federal Reserve will not be able to hike rates due to weak global economic growth and the high value of the US Dollar. If the Fed hikes, the Dollar will advance further. This could reduce foreign investment and weigh on export growth.
During Wednesday’s European session, the AUD USD exchange rate was trending within the range of 0.7458 to 0.7510.
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