After forging new 3-month highs late yesterday, the Australian dollar unwound gains overnight with price action easing back toward the 106 US cent level. The local unit rose to highs of 106.9 US cents as European Indices made solid gains, but the momentum was lost as U.S stocks drifted lower. We've seen a strong mid-week performance from the local unit, underpinned by a decidedly week greenback in the ensuing period of the FOMC decision on Wednesday. Inadvertent or not, the Fed's 'weak dollar policy' is well and truly in place with Wednesday's FOMC decision showing the Fed may keep the federal funds rate at low levels until 2014 and implement further QE despite what appears to be a fledging U.S recovery. Naturally, the premise of lower rates for longer and further stimulus serves to promote greenback weakness; risk assets such as the Aussie dollar are the prime benefactors.
U.S durable goods outpaced expectations but less than inspiring new home sales data combined with continued worries across the Atlantic capped upside for sentiment overnight with the S&P500 finishing 0.65 percent lower. We've still yet to see any closure to the private sector write-down talks in Greece and the conjecture from all corners of the market continues as global investors ponder the repercussions of a hard-default scenario.
In essence, the premise of exceptionally low interest rates coupled with the potential for further monetary stimulus in the form of quantitative easing gives an environment conducive to strength from risk assets; this portfolio includes the Aussie dollar. On balance, we consider two parts to the 'strong Aussie' equation is in play - China appears to be engineering a soft landing and the U.S is showing signs of economic remission. The third unknown and potential negative factor remains with the Euro-region. The Aussie dollar now has a solid platform to continue gains with 107.5 US cents the next potential target should Euro-concerns remain contained. At the time of writing the Aussie dollar is buying 106.2 US cents.