Uncomfortably volatile at the best of times, the Australian dollar exchange rate got saw plenty of everything this week. It traded lower awaiting the US Federal Reserve’s monetary policy meeting, was on afterburners after some soft US data, and was only marginally bothered by the Greek crisis heading into the weekend.
Mixed messages from US Federal Reserve
The decision to leave rates alone this month was a foregone conclusion. The statement that accompanied the announcement inevitability created more theatre in the US interest rate drama. While still claiming to expect a rate increase (or two) in 2015, the central bank said increases would be gradual. But in the same breath, they cut economic growth forecasts for the year. Huh? I am confused!
Part of the reason for the severity of the move in the AUD to USD exchange rate was trader speculation. Traders were generally betting on a more clear and aggressive stance from the Fed. Disappointment ensued on the less encouraging and uncertain statement prompting a sell-off of US dollars.
Unwilling to sit on the sidelines, the Greek default story again gave foreign exchange markets plenty last week. With most leaning further and further towards a default and Eurozone exit, a couple of headlines was all it took to spark plenty of volatility. As negotiations stalled, a surprise story appeared that Greece’s European creditors may agree to an extension of emergency funding beyond the June 30 expiry of the bailout program. The rumour nudged the Aussie dollar exchange rate higher by over a cent. The fact was an extension of emergency funding to Greek banks explicitly while negotiations on the bailout program continue into the eleventh hour.
Fully expect further volatility in exchange rate markets as a result of both the Greek situation in Europe and the US interest rate discussion. It is hard to believe but China has become a passenger in the short-term. But watch iron prices, a large contributor to the Australian dollar exchange rate.