The Australian Dollar to US Dollar exchange rate surged on Tuesday as investors looked to make profit on what many predict will be a lack of policy change during the Federal Reserve’s upcoming meeting. Risk sentiment was also on the up despite RBA rate cut bets.
Despite anxiety in Australian markets towards the quickly approaching publication of Q2’s Australian inflation results, the ‘Aussie’ Dollar surged higher against many currencies on Tuesday – including the US Dollar. AUD/USD shot up to a weekly high of 0.7533 on Tuesday afternoon.
The Australian Dollar has experienced considerable pressure over the last week, plummeting as bets that the Reserve Bank of Australia (RBA) would cut interest rates rose.
The resulting profit-taking has since pushed AUD higher.
Bets that the Federal Reserve would not hike US interest rates, as well as the expectation that the Bank of Japan (BoJ) would be introducing stimulus measures of some kind this week, led investors away from ‘safe-haven’ currencies towards risk-correlated ones.
A weakened US Dollar has also helped the ‘Aussie’ advance, with investors pouring out of USD to the Japanese Yen, according to IG market analyst, Angus Nicholson;
‘Leaked overnight were signs that Japan’s stimulus will be smaller than what markets had expected and this drove the Yen higher against the US Dollar,
As a result, the US Dollar has weakened against a range of other currencies.’
The US Dollar seemingly lost some of its sturdiness on Tuesday, despite recent data suggesting that the US economy remained in good health amid a slew of global economic strains.
However, with analysts widely predicting that the Federal Open Market Committee (FOMC) will leave the key US interest rate frozen when it meets during Wednesday’s American session, investors looked elsewhere in order to make their profits.
The ‘safe-haven’ US Dollar lost out to riskier currencies amid the expectation that the US Dollar would not be shooting up in value any time soon. Instead, investors sought out bigger movers like the Australian and New Zealand Dollars.
USD also plummeted in response to news that the Bank of Japan (BoJ) would potentially not be as aggressive with stimulus policy as markets previously expected. This caused the US Dollar to plummet against both its ‘safe-haven’ rival, the Yen, as well as riskier currencies.
Wednesday is due to be a key session for the AUD/USD exchange rate, with vital news due for release from both Australia and the US that could give markets a more solid indication of what’s around the corner.
Most importantly for ‘Aussie’ investors is Australia’s Q2 Consumer Price Index (CPI) report. These upcoming key inflation figures are set to be single biggest indication of whether or not the Reserve Bank of Australia (RBA) will cut Australian interest rates when it meets next week.
If inflation remains low or edges towards deflation, RBA rate cut bets will soar and the ‘Aussie’ will plummet, likely reversing many of Tuesday’s gains.
This will be followed by the Federal Open Market Committee’s (FOMC) July interest rate decision meeting in Wednesday’s American session.
Rates are expected to be left frozen, but if policymakers play down the effects of the Brexit on the US economy, 2016 rate hike bets will rise. This could also mute any potential losses the ‘Greenback’ will experience in response to the news.
However, if the Fed continues to express great concern over the Brexit, the US Dollar could plummet and 2016 rate hike bets could drop below 50% once more.
At the time of writing, the Australian Dollar to US Dollar (AUD/USD) exchange rate trended in the region of 0.7525, while the US Dollar to Australian Dollar (USD/AUD) exchange rate traded at levels around 1.3280.
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