AUD vulnerable ahead of Fed policy update and falling commodity prices

AUD - Australian Dollar

The Australian dollar slipped below 0.77 US cents on Tuesday, hampered by a sustained risk-off move and a downturn in key commodity prices. Markets largely ignored the RBA’s June meeting minutes, with little additional guidance contained within the meeting notes. Investors have flagged next month's meeting as a pivot point in forward guidance, anticipating policymakers will announce an amendment in the size of monthly bond purchases while maintaining the current yield curve target. Instead, the AUD came under pressure as copper prices fell 4% on reports that China will release some of its stockpile in a bid to control commodity prices. Copper prices have fallen 11% since the mid-May high and while still historically elevated may struggle to hold onto current levels through the weeks ahead. Having slipped below 0.77 US cents, the AUD touched intraday lows at 0.7674 before creeping higher into this morning’s open.

The AUD continues to face near term headwinds and while supported on moves approaching 0.7670/80 there is scope to suggest a sustained risk-off run could force the currency toward 0.7630/0.7580. Attentions today turn to the FOMC meeting and press conference. We anticipate direction will remain muted in the lead up as investors keenly await any suggestion the Fed has begun discussing the tapering of bond purchases while updating their interest rate projections.

Key Movers

The US dollar crept higher through trade on Tuesday amid a more cautious backdrop and increase demand for haven assets. Risk aversion has allowed the CHF and JPY to outperform this week, while the euro also found support creeping higher. Commodity currencies are the days big losers, with the CAD following the AUD and NZD lower despite an uptick in oil prices. Brent Crude Oil prices rose 1% on the day, touching their highest level in two years at 73.60 a barrel. With supply constrained and demand increasing, there is scope to suggest oil prices will continue to rise, with some analysts suggesting $100 a barrel is not out of the realm of possibility.

Our attentions turn now to the FOMC meeting. While we expect the Fed will maintain the current policy platform, there is a growing expectation policymakers will at least begin the discussion of tapering bond purchases while bringing forward interest rate expectations. We are keenly attuned to the Fed’s dot plot as a key market of possible interest change. Despite the optimism in some circles, we anticipate the Fed will maintain its current rhetoric and at best offer flimsy guidance on the conditions required to prompt a change in policy.

Expected Ranges

AUD/USD: 0.7630 - 0.7780 ▼

AUD/EUR: 0.6290 - 0.6360 ▼

GBP/AUD: 1.8180 - 1.8440 ▲

AUD/NZD: 1.0750 - 1.0820 ▲

AUD/CAD: 0.9340 - 0.9390 ▲