I’m not sure why the markets were surprised by the minutes from the Fed’s September meeting released last week. As I mentioned a month ago in my piece titled The US dollar is at war with the Fed, a stronger greenback threatens the economic recovery. Now that the minutes have confirmed the Fed is discussing the issue, we are seeing the market reacting by pushing back expectations around the timing of rate rises -- softening the US dollar rally.
Since I wrote that article, the Aussie dollar has fallen significantly, mainly due to a continuation of the US dollar rally. Of course the big move lower in commodity prices and equities has sent shivers through the financial markets and as such the Aussie has been sold off on the back of risk aversion.
What’s new in Oz?
I still don’t believe economic fundamentals in Australia have changed much in the last month. The main difference is increased uncertainty around the employment outlook -- little else has changed domestically. We still have a relatively high yield and AAA rated debt and rates are on hold, not heading lower. Yes there are some risks with a slowing China, however a 10 per cent drop in the Aussie makes the long AUD play even more attractive than it was a month ago.
The US central bank needs to tread carefully not to move rates too soon or too far as they may threaten the domestic economic recovery. A combination of an economic slowdown and the threat of a deflationary spiral in the eurozone could quite clearly turn to panic.
At the same time the market is very long USD so there is room for some more profit taking -- we are already seeing some signs of a pullback in the USD/JPY.
Speculators have driven the AUD/USD to 0.8650 and they could just as quickly send it higher again. From a technical perspective the charts are showing some strong signs of support and if US dollar profit taking continues amidst a more cautious Fed I expect a slow grind back towards 90 cents.
Jim Vrondas is Chief Currency strategist, Asia-Pacific at OzForex, a global supplier of online international payment services and a key provider ofForex news. OzForex Group Limited is a publicly listed entity with shares traded on the Australian Securities Exchange under the code "OFX".