Australian Dollar Outlook – December 18, 2014

Australian one dollar coins surround a U.S. one dollar note in this photo illustration taken in Sydney July 27, 2011. Australian consumer prices rose by more than expected last quarter while underlying inflation proved alarmingly high, reviving pressure for an increase in interest rates and lifting the local dollar to a 29-year peak. Reuters/Tim Wimborne

Bell FX Currency Outlook: The Australian Dollar has dipped suddenly to USD 0.8120 following headlines the FOMC had dropped the "considerable time" phrase with respect to its guidance on interest rates, and instead deciding it could be "patient in beginning to normalise" policy.

Australia: The FOMC acknowledged the weakening in inflation, but maintained its positive language around growth and said it expected to hike rates in 2015 which supported the USD broadly. The AUD has forged another new low and with little domestic news today, this trend is likely to continue. Ahead of the FOMC meeting, the USD was already gaining ground, with some investors positioning themselves for an upbeat tone.

Chair Yellen delivered comments in her press conference noting normalisation is more likely to begin in April with the first rate rise. Indeed, she emphasised a number of participants indicated the middle of 2015 could be more appropriate. Of course, she made sure to stress the data-dependent nature of such an assessment. With November's strong labour market report in mind, it seems FOMC members will remain on this timeline. Separately, she confirmed the Fed's view that the fall in oil prices is a positive for the US economy, and that the Fed will look through the dampening impact on inflation. Locally, today sees the RBA's Bulletin for the December quarter is released at 11.30 am AEDT. Detailed quarterly labour force data (which contains industry breakdowns) for November will also be released. It seems the USD will likely continue to rally, as expectations of a mid-2015 rate hike firm placing more downward pressure on the AUD to test 0.8100 and lower. Being a commodity currency, any change to expectations of an earlier rate rise could see commodities weaken further and place more pressure on the AUD.

Majors: The USD rallied on slightly stronger oil prices, and extended gains after the FOMC meeting (after some volatility). The big news was the Fed moving towards normalisation. US Treasury yields finished modestly higher across the curve, although performance diverged after the FOMC meeting with the 2-year initially rallying while the 10 year sold off further. The EUR/USD was dragged lower following comments from ECB's

Coeuré that the Bank "needs to do more'" to raise inflation and boost the economy. The rouble strengthened, after the Russian Central Bank announced a number of measures to stabilise the banking system. European equities and core European sovereign bond yields ended the session little changed, while peripheral yields dropped following Coeuré's comments. Base metals were mixed while oil markets were stronger as strong buying interest emerged for the first time in weeks, in a move that wasn't driven by fundamentals. Good luck today.

Economic Calendar

18 DEC NZ GDP Q3

AU RBA Quartly Bulletin

UK Retail Sales Dec

US Initial Jobless Claims Dec-13

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