Aussie dollar holding up well despite strong US dollar

“The Aussie dollar is clearly benefiting from the availability of cheap US finance, but it would be naïve to assume the Aussie dollar would not experience substantial outflows if US rate hike expectations continue rising,” said Stephen Innes, senior currency trader at FX and CD provider OANDA Australia and Asia Pacific.

“From a trader's perspective the current Aussie carry trade, given the small interest differential, is a tough way to make a living,” said Innes. 

“Not only is this trade getting crowded but collecting nickels (5 cent coins) in front of a freight train can be a risky business especially when the prospects of narrowing US interest rate differentials coupled with broader US dollar strength looms on the horizon,” said Innes.  

He added, “In the meantime, the Aussie is still getting a lot of favourable support against most major currencies due to rising risk appetite and the country’s triple A credit rating.”

However, Innes pointed out that the markets will be closely monitoring the US Fed and the direction it will take on future interest rate decisions.

“Let's face it there will always be a rewritten risk chronicle when the Federal Reserve raises interest rates as the potential for market fallout will intensify,” he said. 

He added, “How the Fed navigates this path to interest rate normalisation will be the medium term key for not only the Australian dollar but other G10 currencies,”

“It is imperative to keep close tabs on the Fed fund futures, the market is now pricing around a one in four chance of a September tightening a close to a 50/50 chance of a rate hike by the end of the year,” he said. 

According to Innes, another robust US jobs report in August, and the near-term Fed rate hike expectations will likely jump two folds. 

“Moreover, if the US election polls turn skewed for status quo by the next Federal Open Market Committee (FOMC), the Feds may conceivably pull the rate-hike trigger as early as the September meeting,” said Innes. 

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