USD looks to FOMC minutes for inspiration

Notwithstanding a material downturn in commodity prices, the Australian dollar moved higher overnight. Late yesterday it looked as though the local unit might come under some pressure in light of its correlative value with commodities, but it seems it seems positive sentiment in Europe kept its appeal intact. We’re also heard some talk about short-covering as participants take bets of the table that the RBA will cut rates.

But it’s hard to argue against any real upside momentum over the medium and long term in the face of weakening commodity prices and we’ve seen the Aussie on the back foot again in the local session as a result.

There’s also the policy divergence factor to think about. That is, markets are pricing rate increases in the U.S while the opposite is true for Australia. Based on this you’d be forgiven for thinking the Aussie’s trajectory will be lower, however with market participants pricing in, re-pricing, and pricing-out changes to rates – it’s never really that simple.

At the time of writing the local unit is buying 71 US cents.

AUDUSD – Weekly snap shot

While we’re on the Aussie, let’s have a quick look its performance against the Yen. According to our resident Technical Analysts, Adam Taylor, it’s reaching the top end of a longer-term range, and the resistance level of 88.00 appears to be keeping the buyers in check for the moment. Taylor points out it’s interesting that the lack of impact recent geopolitical events have had on this pair, and anticipants more risk averse flow towards the Yen.

AUDJPY appears capped at 88-figure

Back to the greenback, and it remains on a northern trajectory. This is of course indicative of the pricing in of a return to ‘normal’ interest rates. The below USD dollar index chart which is the value of the US dollar against a basket of its major counterparts, demonstrates its course higher over the last 12 months.

Dollar Index (DXY) Chart by Bloomberg

The dollar’s performance from here will be contingent on what we hear from the Federal Open Market committee (FOMC) meeting, with the release of the November meeting minutes this evening AEST. It’s all about rates and the more upbeat the minutes, the greater the chance of a rate increase in December, in turn a US dollar-positive. Remember, the FOMC have a dual mandate of employment and inflation. In the FOMC's statement after the October meeting said they expect inflation to remain low in the near term and gradually rise towards the 2% target in the medium term based on an improved employment outlook.  They also believe low inflation caused by energy and import prices were transitory.

Since then we saw solid U.S labour stats for the month of October, again another tick in the box to increase the fed funds rate.  Still, there’s the thought that the Fed may stay on hold in light of the threat of increased global economic uncertainty due to the recent terrorist attacks. CNBC discusses this in an article earlier this week – worth a quick read.