Volatility in global commodity prices helped to erode the Australian Dollar at the beginning of last week, as base metals continued to weaken in response to slowing demand from China. Investors were also not especially encouraged by the December meeting minutes of the Reserve Bank of Australia (RBA), which failed to rule out the possibility of fresh interest rate cuts in the coming year. Nevertheless, as policymakers showed a relatively positive attitude with regards to the outlook of the Australian economy the ‘Aussie’ did not remain in a slump for long.
Although pundits remained generally focused on Wednesday’s Federal Open Market Committee (FOMC) policy meeting the US Dollar did see an increase in demand on the back of the latest domestic Consumer Price Index data. Baseline inflation within the world’s largest economy was show to have risen from 0.2% to 0.5% on the year in November, clocking in as forecast to add support to bets that the Fed would opt to raise interest rates. Trader positioning ahead of the final rate decision of the year also helped to drive the AUD/USD exchange rate lower on Wednesday.
Markets were not particularly surprised by the Fed’s decision to raise interest rates by 0.25%, as this hike had been well signalled in advance and already largely priced into the strengthening ‘Greenback’. As Fed Chair Janet Yellen was careful to emphasise the gradual and data-dependent nature of any future rate decisions the immediate impact of this hike was relatively limited, with the AUD/USD currency pair returning to an uptrend in the Australasian session. The antipodean currency was boosted further by speculation that the FOMC might have chosen to move too soon, as a number of economists suggested that the central bank could be prompted to reverse this rise in 2016 if inflation falters or the global slowdown continues to drag on the domestic economy.
As Friday’s US Services PMI proved substantially disappointing, slipping sharply from 56.1 to 53.7, demand for the US Dollar was dented. While the service sector continues to expand this slowing did raise some concerns, allowing the AUD/USD exchange rate to surge back to 0.7193 ahead of the weekend.
With Australian data limited before Christmas the ‘Aussie’ has resumed a general downtrend against rivals, particularly as base metals continue to trend in the region of multi-month lows. Wednesday’s Conference Board Leading Index may offer a fresh boost to the Australian Dollar if the domestic economy continues to show signs of strengthening. Should November US Durable Goods Orders be shown to have contracted by -0.7% following the previous month’s 2.9% gain, the AUD/USD pairing is likely to climb further on fresh US Dollar weakness.