Australian dollar hits two-week peak before Fed rate verdict, with wagers on big move

SYDNEY – The Australian dollar hit a two-week peak on Sept 18 due to wagers that the US Federal Reserve would kick-start its easing cycle with a big move, although that is far from certain and those gains could easily evaporate.

The Aussie climbed to US$0.6773, the highest since Sept 3, although it is battling sellers at a key level of US$0.6767 after three sessions of gains.

Meanwhile, the Kiwi dollar rebounded 0.3 per cent to US$0.6202, having slipped 0.2 per cent overnight. Support comes in at US$0.6155 and US$0.6107, with resistance at US$0.6253 and US$0.6298.

Both have benefited from bets that the Fed would cut rates by half a point on Sept 18, with futures pricing in a chance of 64 per cent for such a move. That came despite strong retail sales data that failed to move the needle much on the size of the imminent rate cut.

“The USD may receive a small, temporary bump if the Federal Open Market Committee (FOMC) delivers a 25 basis point cut,” said Ms Carol Kong, a currency strategist at the Commonwealth Bank of Australia (CBA). “The USD’s reaction to a larger 50 basis point cut will depend on the FOMC’s communication.

“A 50 basis point cut that scares markets about US economic prospects could increase the USD because it is a safe-haven currency. However, a 50 basis point cut that eases concerns about US economic prospects could undermine the USD.”

How big the Fed goes will have bearings on the interest rate path in Australia. Markets see scant prospect of a cut in the 4.35 per cent cash rate at the Reserve Bank of Australia’s (RBA) meeting on Sept 24, given that policymakers have been sounding consistently hawkish.

However, analysts are tipping the monthly inflation report for August, due one day after the RBA decision, is likely to show headline inflation has slowed back to the target band of 2 per cent to 3 per cent. Both CBA and Westpac expect it to come in at 2.7 per cent due to the Australian government’s electricity rebates.

In New Zealand, data showed the current account deficit widened in the second quarter by more than expected. That prompted Goldman Sachs to lower its estimate for gross domestic product, due on Sept 19, to an annual drop of 0.5 per cent.

That compared with analyst expectations for a decline of 0.4 per cent, a reason that the Reserve Bank of New Zealand may cut aggressively and by 83 basis points by the end of the year. REUTERS