Aussie dollar focused on the Fed this week
In a previous update, we made the case for an Aussie dollar revival. We pointed out the mostly encouraging domestic data that aligns with the RBA’s optimistic growth outlook, an uptrend in key commodity prices and the possibility that the US dollar would struggle to rally further given how much Fed tightening has already been priced in.
This scenario has broadly played out, though the extent of the Aussie’s resilience in the face of the latest phase of US-China trade battles has been a little surprising.
A week ago, it wasn’t yet clear what the timetable was for President Trump’s next step on China tariffs, so an announcement that 10% tariffs on $200bn of imports would commence as soon as September 24 rattled the Aussie – at least initially.
The US tariffs are due to jump to 25% from January unless a deal can be struck in the meantime. China has pledged tariffs on $60bn of US imports once the US tariffs take effect.
But the recovery in the Australian dollar and equity markets soon after the US announcement suggests that this phase of the trade battle was priced into markets already. After all, it was way back on June 18 when President Trump asked US trade representative Lighthizer to identify $200bn in imports to be subject to a 10% tariff, including the threat of yet more tariffs if China responds.
The Aussie is one of the strongest major currencies over the past week, up almost 2%, though trade just under 73 cents is only a 3 week high. Commodities have helped the currency, with iron ore at 6 week highs just under $70 a tonne and copper prices bouncing as Chinese premier Li at the World Economic Forum in Tianjin pledged to support infrastructure spending.
The New Zealand dollar has also had a good week, boosted by a surprisingly strong 1% rise in GDP in the second quarter. New Zealand money market yields rose in response but still price in as much as a 1 in 3 chance of the RBNZ cutting rates by next winter.
But further gains for the Aussie and kiwi will be challenged in the week ahead by the Federal Reserve monetary policy meeting. Markets place a 100% probability on the Fed raising its benchmark funds rate by 25 basis points to a range of 2 to 2.25%. Markets also price yet another rate hike for the December meeting as around an 80% chance.
There will be plenty of interest in the FOMC’s quarterly forecasts of economic growth, inflation and the likely path of interest rates – the so-called “dot plot” – along with Chairman Powell’s press conference. The strength of the US economy and inflation running near the 2% target suggest Powell delivers an upbeat message. But with markets fully priced for such an outcome, the US dollar won’t necessarily rise in response.
The Fed will be the global focus in the week ahead but we will also keep an eye on the US and China tariffs commencing on Monday and the Reserve Bank of New Zealand policy review on Thursday. We will review the Fed decision and Aussie dollar reaction when we speak to you next week.
Sean Callow is Westpac Bank's Senior Currency Strategist, based in Sydney. Sean focuses on the Australian dollar and other G10 and Asian currencies. He has worked in strategy and economics roles in New York, London, Singapore and Melbourne.