Return of US Dollar Caution Prompts AUD/USD to Rally
After sliding on Tuesday the Australian Dollar US Dollar (AUD/USD) exchange rate rallied hard on Wednesday as market caution drove USD lower once again.
At the time of writing AUD/USD is up by 0.28%, almost completely recouping all of Tuesday’s losses.
US Dollar (USD) Tumbles as Sell-Off Continues
After finding some brief respite yesterday the sell-off of the US Dollar appears to be back in full force this morning, dropping AUD/USD close to a four-month low.
This comes as Europe appears to be becoming the new epicentre of global growth, with markets flocking towards the Euro (EUR) as Eurozone growth booms, with USD/EUR touching a new three-year low earlier today.
On top of this the weakness in the US Dollar is prompting many investors to recalibrate their forecasts for monetary tightening from the Federal Reserve this year.
Neil MacKinnon, Global Macro Strategist at VTB Capital, said;
‘The US dollar’s weakness threatens to complicate monetary policy given the tightening implied by currencies appreciating against it. US trade policy and political dysfunctionality in Washington seem to be the main culprits.’
Slump in Iron Ore Prices Trim Australian Dollar’s (AUD) Gains
While the Australian Dollar put in a strong performance against the US Dollar on Wednesday, its performance against many other major currencies was significantly more modest.
This was largely down to a drop in iron ore prices, with spot prices for the key Australian export tumbling to $74.29 at the start of the session.
This was down around 3% on Monday’s closing price and marked the largest single day decline of the year so far.
Observers suggest that the sharp decline is likely down to reduced steel output in China, with steel mills purchasing less iron ore as the government seeks to curb production over environmental concerns.
Analysts at ANZ Bank said;
‘Futures prices in China failed to gain any traction as traders failed to follow through with purchases following the strong close last week. This suggests that the restocking activity we saw emerge last week looks relatively weak.’
AUD/USD Forecast: US Homes Sales to Slide?
Looking ahead the AUD/USD exchange rate may continue to rally early on Thursday with the release of the latest US housing figures.
Economists forecast that US Existing Home Sales will have slowed to 5.7m last month, after shooting up to 5.8m in November.
Meanwhile the lack of notable domestic data this week is likely to see movement in the Australian Dollar continue to be driven by external influences such as commodity prices as risk appetite.