US markets poured cold water on yesterday’s rapturous response to the Fed rate hike by Asian markets. This will see volatility continue into the year end. After gaining 4% over two days, the ASX 200 index is vulnerable to some profit taking and a soft end to a volatile week.
The mining and energy sectors will be unsettled by how weak the recent corrective rally in commodities has been and clear signs that downward price pressure is returning.
However, a weaker $A overnight will help soften the blow for Australian markets. The US Dollar’s strong response to the Fed rate hike will have the effect of exporting some of the US economy’s strength while importing some of the globe’s weakness to the US.
Sydney Airport’s announcement that international passenger traffic in November was up 5.6% compared to last year reflects the sort of benefit that Aussie dollar weakness is creating for many areas of the economy.
How strong the US dollar gets in response to the Fed’s rate hike now looms as the central question for world markets. There is a degree of circularity in this. It’s likely that $US strength will be one of the key determinants of how quickly the Fed lifts rates. A strong dollar is likely to keep the Fed cautious until such time that there is clear evidence that wage growth and the domestic US economy can push inflation towards its target.