USD Begins To Fight Back, Aussie Jumps

The indifferent USD run of form is showing no signs of slowing down, with the USD trading higher against the majority of its main trading partners throughout Tuesday’s European session. The complete divergence in both economic sentiment and monetary policy is continuing to attract traders towards the USD and at the end of the day, although traders are going to become impatient with the Federal Reserve regarding any hesitance shown towards raising interest rates – the Federal Reserve can still contemplate the idea before other central banks and this is exactly what is encouraging traders towards the USD.

It is going to become a repetitive topic, but central bank policy divergence is going to continue driving currency market volatility for quite some time. The upcoming quarter is going to be interesting as there will be times when traders become extremely frustrated with any indications of hesitance from the Federal Reserve, and as a result take profit on USD positions very suddenly. I am looking at tomorrow’s FOMC Minutes as a potential market risk, because any indications that the Federal Reserve might still be considering a rate increase in June would most probably lead to traders rushing towards the USD. As a result, I would also expect any hawkish language to accelerate bearish momentum in the euro, while also punishing commodities and emerging market currencies.

This is a risk heading into the FOMC Minutes, however it is only a potential one and I would prefer the chances of the Federal Reserve maintaining its cautious tone tomorrow evening. The prospect of a widespread USD correction is still being talked about following the horrendously weak NFP result to conclude last week, but I can’t see this occurring unless serious concerns emerge that the Federal Reserve could swerve away from its previously repeated intention to begin raising interest rates this year. Don’t get me wrong, the NFP was weak but it’s way too soon to start becoming concerned about the health of the US economy. As weak as the NFP was, I am just looking at it as another reason for the Federal Reserve to be hesitant towards raising rates as soon as the USD bulls would like, while also seeing it as providing the perfect reason for the Fed not to hike in June.

The Aussie has jumped over 130 pips to 0.7710 after the Reserve Bank of Australia (RBA) left interest rates unchanged this month. When people discuss the most surprising central bank decision of the year, the Swiss National Bank (SNB) will spring to everyone’s mind as the clear frontrunner but I do think the RBA interest rate cut a few months ago should be considered further down the line. The RBA spent the majority of last year talking down the Aussie and when they finally achieved a weaker currency (which declined from 0.92 to 0.77 in around six months) they decided to cut interest rates. A likely reason behind the interest rate cut was to speed up the Aussie decline, but all it did was raise traders’ expectations for further continued interest rate cuts.

As soon as the RBA unexpectedly cut interest rates I stated that there was a risk of shorts being squeezed and a complete pause in selling, and this is exactly what happened.


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