A general increase in risk aversion weighed on the Australian Dollar at the start of the week, with investors unsettled by the latest escalation in tensions surrounding North Korea.
As the rhetoric continued to heat up, the appeal of the risk-sensitive ‘Aussie’ declined, even though markets have shown some degree of complacency over the situation in previous weeks.
The antipodean currency was also dented by the latest comments from Westpac Chief Economist Bill Evans, who cautioned that the Reserve Bank of Australia (RBA) is not likely to raise interest rates before 2019.
This naturally weighed on AUD exchange rates, prompting markets to somewhat unwind earlier bets on the prospect of near term action.
Safe-Haven Demand Shores up US Dollar
Demand for the US Dollar, meanwhile, strengthened sharply thanks to its status as a safe-haven asset. The ‘Greenback’ particularly benefitted from the relative weakness of the Japanese Yen, which has softened in response to Prime Minister Shinzo Abe’s decision to call a snap general election.
Although the US consumer confidence index unexpectedly dipped in September, this was not enough to boost the AUD USD exchange rate on Tuesday. As the weakening could largely be attributed to the recent hurricanes, investors were quite happy to shrug off this disappointing result, with a rebound expected in October.
Even as US data continues to paint a relatively mixed picture of the economy’s health, markets still remain confident that the Federal Reserve will pursue its policy tightening cycle in the coming months.
This has helped to limit the downside potential of the US Dollar, although investors have already priced in higher odds of a December interest rate hike.
Solid US Data to Limit AUD USD Upside
Support for the ‘Greenback’ could strengthen on Wednesday if August’s durable goods orders figure shows a solid rebound on the month. With the Fed already looking rather hawkish, any further positive data is likely to maintain the appeal of the US Dollar, particularly if market risk appetite remains muted.
The latest commentary from various members of the Federal Open Market Committee (FOMC) will also be in focus over the coming days. Unless policymakers sound a distinctly more cautious tone, the AUD USD exchange rate is unlikely to find any particular rallying point, however.
With Australian data thin on the ground this week, the ‘Aussie’ may struggle to gain any traction against its rivals. However, an uptick in private sector credit could boost the antipodean currency ahead of the weekend, pointing towards greater domestic confidence.
On the other hand, if the global geopolitical situation continues to deteriorate the AUD USD exchange rate can be expected to extend its downtrend further. Any signs that the threat of an armed conflict is rising may weigh heavily on the risk-sensitive Australian Dollar.