Stock Market Rout Weighs on Commodity-Correlated ‘Aussie’
Any hopes for global stock markets to recover some of January’s severe losses while the Shanghai Composite Index was closed in observance of the Lunar New Year were summarily dashed, as a major selloff quickly gained momentum at the start of the week. Investors have struggled to attribute any particular cause for this abrupt resurgence in volatility, with global slowdown fears growing in the absence of any major economic data on Monday. Mining and banking shares have been particularly hard hit during this latest rout, with commodity weakness and risk aversion dragging on the Australian Dollar.
Although Tuesday saw the NAB Business Confidence Index hold steady on the month in January this failed to particularly support the slumping ‘Aussie’, particularly as safe-haven demand saw investors flocking back to the stronger US Dollar. Unexpectedly weak German trade data equally shored up the ‘Greenback’, thanks to the negative correlation that exists on the EUR/USD currency pair.
Fed Leaves Door Open to Further Interest Rate Hikes
Some of the US Dollar’s bullishness diminished ahead of the latest comments from Fed Chair Janet Yellen, who testified before Congress on matters of monetary policy and economic outlook, as traders were inclined to adopt more cautious positions in anticipation of the policymaker’s words. Yellen proved a little more neutral and evasive than markets had hoped, continuing to highlight the stronger fundamentals of the US economy while also acknowledging that global downside risks are building. As the Chair did not conclusively rule out the possibility of another interest rate hike in the imminent future, expressing relative confidence with regards to future monetary tightening, the ‘Greenback’ initially surged across the board in response.
However, as investors mulled over the statement further the US Dollar ceded back some of its gained ground with persistent volatility continuing to rout global stock markets. While the wisdom of the Fed’s current approach to monetary policy remains somewhat in question the ‘Greenback’s status as a safe-haven kept demand higher on Thursday. After the surprisingly aggressive interest rate cut of the Riksbank a sharp uptrend in the ‘Buck’ dented the AUD/USD exchange rate further.
Australian Dollar Weakened by Speculation on Odds of RBA Rate Cut
A steady Australian Consumer Inflation Expectation reading for February boosted the ‘Aussie’, as consumers continued to display faith in the strength of the domestic economy, although these gains were ultimately short-lived. The potential of another Fed rate hike, paired with the Riksbank moving further into negative interest rates, has raised speculation that the Reserve Bank of Australia (RBA) could be prompted into loosening monetary policy in the near future. While domestic data remains generally more optimistic continuing commodity pressures may still encourage policymakers to cut amidst the worsening global outlook.
Ahead of the weekend the AUD/USD currency pair is expected to suffer a fresh softening as both the US Advance Retail Sales and University of Michigan Confidence Index are forecast to show improvement on the month. However, if the latest Australian Home Loans figure reveals further growth within the domestic housing market the ‘Aussie’ may still achieve a more bullish run.