The US Dollars' Defining Moment

Few economic news releases are as highly anticipated. Even fewer have the clout to send shockwaves around the globe. It’s the US interest rate decision this week, and by default the greenback’s moment of truth. Well, perhaps that may be a little dramatic, but in any case, what we hear from Yellen’s Federal Reserve this week may very well change the near-term course of currency values.

Certainly looking the US economy, a rate hike by the Fed this week may be perhaps symbolic of an economic recovery. It’s the first rate hike since 2006, after which the Fed – led by former Chair, Ben Bernanke during the Global Financial Crisis – famously slashed rates and embarked on a monumental stimulus effort.

This Thursday the Federal Open Market Committee are expected to increase the Federal funds rate from 0.25% to 0.50%. While it represents a significant blow to the USD if the Fed unexpectedly holds rates, the real concern for those maintaining long side positing is if market participants are not convinced there are more rate hikes to come. The latter would see things get interesting, given the residual effect on global currencies. Currencies such as the Australian dollar, by default, may very well skyrocket if the Fed fails to deliver. The abstract effect of this is of course more pain for the Reserve Bank and possibly more rate cuts… but of course that’s jumping the gun.

Nevertheless, currency moves are not only governed by a decision itself and how much is ‘priced-in’, but most importantly the perception of the future and how it’s corresponded to the market place. This is of course a fact the Fed are all too aware of, and one imagines Yellen and co scouring through every line of the post decision statement to carefully manage market expectations, without shocking markets too much. It’s a balancing act and recent decisions (and subsequent volatility) by the European Central Bank and Reserve Bank of New Zealand are testament to the sort of volatility these types of decision can bring.

In the lead up we’re seeing is broad based USD strength but I doubt it’ll be a one-way trade in the lead given the stakes. This week’s data in the lead up may prompt a little rebalancing with CPI, housing and manufacturing data in the lead up to the main even on Thursday.

US Dollar leading the pack ahead of FOMC

Locally, the economic calendar is pretty scarce this week with the exception of the RBA December meeting minutes and house price index on Tuesday. The Australian dollar is currently trading at 71.9 US cents.