Aussie Dips Under 72

 | Dec 15, 2015 12:28PM ET

The Australian dollar has posted considerable losses on Tuesday, erasing most of the gains the currency picked up a day earlier. In the North American session, AUD/USD is trading slightly below the 0.72 line. In economic events, the RBA minutes gave a thumbs-up to the economy, but the Treasury didn’t sound as optimistic in its Mid-year Economic and Fiscal Outlook. Over in the US, Core CPI posted a gain of 0.2% and CPI came in at 0.0%, as both reports matched their estimates. As well, the Empire State Manufacturing Index posted a fifth consecutive decline, coming in at -4.6 points. All eyes are fixed on the Federal Reserve policy meeting on Wednesday, with the Fed expected to raise interest rates for the first time in almost 10 years.

There were no surprises from US consumer inflation numbers on Tuesday. Core CPI, which is carefully monitored by the Federal Reserve, remained at 0.2% for a third straight month. CPI dipped to 0.0%, down from 0.2% in November. Both indicators matched their forecasts, so these readings are unlikely to make any waves in the markets. More importantly, these numbers, although pointing to a weak inflation picture in the US, are unlikely to deter the Fed from a widely expected rate hike on Wednesday.

There were mixed messages about the health of the Australian economy on Tuesday. The RBA minutes of the recent policy meeting noted an improvement in employment numbers and said the economy was improving. However, in its Mid-year Economic and Fiscal Outlook, which can be considered a report card for the economy, the Treasury lowered its May growth rates, from 2.75% to 2.5% in fiscal year 2016, and from 3.25% to 2.75% in fiscal year 2017. The report added that the country’s debt and budget deficit will be larger than previously expected.

Investors are playing it cautious, waiting for the upcoming crucial Fed meeting which could prove to be the economic release of the year. The Fed will conclude a two-day policy meeting on Wednesday and all indications are that the Fed will raise rates by 0.25%, to be followed by further rate hikes in 2016. The Fed last raised rates back in June 2006, and Fed chief Janet Yellen and other policymakers have sent broad signals to the markets that the US central bank if finally ready to press the rate trigger. The US economy is close to full employment, and Yellen recently stated that she was not concerned about persistently low inflation. How will the currency markets react to a historic rate hike by the Fed? Given that the markets have had ample time to price in this event, we may not see a strong response immediately after the event. At the same time, even a small rate increase represents a huge shift in the Fed’s monetary policy, which could help boost the US dollar against its rivals in the near future.

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Tuesday (Dec. 15)

  • 00:30 Australian Monetary Policy Meeting Minutes
  • 00:30 Australian Mid-Year Economic and Fiscal Outlook
  • 00:30 Australian HPI. Estimate 2.1%. Actual 2.0%
  • 00:30 Australian New Motor Vehicle Sales. Actual 1.0%
  • 13:30 US CPI. Estimate 0.0%
  • 13:30 US Core CPI. Estimate 0.2%
  • 13:30 US Empire State Manufacturing Index. Estimate -5.7 points. Actual -4.6 points
  • 15:00 US NAHB Housing Market Index. Estimate 63 points. Actual 61 points
  • 21:00 US TIC Long-Term Purchases. Estimate 32.4B

Upcoming Key Events

Wednesday (Dec. 16)

  • 13:30 US Building Permits. Estimate 1.16M
  • 19:00 US FOMC Economic Projections
  • 19:00 US FOMC Statement
  • 19:00 US Federal Funds Rate. Estimate
  • 19:30 US FOMC Press Conference

*Key releases are highlighted in bold

*All release times are GMT

AUD/USD for Tuesday, December 15, 2015