Aussie dollar sold off as US interest rate jitters hit markets

“The Aussie dollar has run out of gusto as the hawkishness of the European Central Bank (ECB) and US rate hike jitters have taken hold of currency markets,” said Stephen Innes, senior currency trader at CFD and FX broker OANDA Australia and Asia Pacific.

“Traders sold off the Aussie dollar with impunity, along with other risk-sensitive currencies,” Innes added.

According to Innes, “We could be on the verge of a powerful concurrence of factors as volatility takes grip. Traders have been quick to price in worst case scenario as interest rate rise jitter start taking hold and has resulted in some fairly assertive moves in bond, equity, and forex asset classes.”

There are two concurrent explanations for what is driving sentiment according to Innes.

One, The ECB did not extend its Quantitative Easing (QE), which provoked a sell-off in Bund markets, which fed into the medium to long end US Bond curve.

Two, traders have convinced themselves the US Feds are marching out Leal Brainard, known for her dovish leanings, to bang the Fed’s September rate hike drum.

Fed members Brainard, Lockhart, and Kashkari are all set to talk on Monday and the final speakers before the blackout period start at midnight on September 13.

Innes said, “Brainard is the key piece of the September jigsaw puzzle and will attract the most attention.”

At this stage, he said there's a consistent undertone building among the Fed Board that delaying rate hikes will hinder rather than assist the economic recovery. 

“However, as the market comes to grip with this real possibility and prepares for currency market turbulence, what is important to remember is that September or December timing is secondary to that actual pace of US rate hikes,” Innes said.

He added, “In which case, it is equally important that the Feds clearly communicate their intentions to help minimize market volatile.”

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