The Australian dollar was hammered last week reaching a new 4.5 year low of US81.07 cents as Russia moved to drastically increase Interest rates and the US Fed signaled that they may be ready to lift Interest rates as early as April next year.
Russia’s central bank, in a move that shocked the market, lifted interest rates by 650 basis points to 17% in an attempt to halt the slide of the rouble, which jumped as high as 80 roubles to the dollar before rallying more than 10% after the announcement. The bounce however proved to be short lived, as traders brushed off the increase in rates and sent the currency tumbling again to over 80 per US dollar before pulling back to around 72.
“We are in the midst of a full- blown Russian economic crisis caused by the collapse in oil prices,” Westpac chief currency strategist Robert Rennie said.
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“With industrial commodity prices remaining under pressure this week and the Russian economic crisis causing rising risk aversion, it’s no surprise the Australian dollar remains weak.”
Expecting further drastic measures which may include capital controls and may add to further pressure on the Aussie currency, Michal Dybula, from BNP Paribas noted that,
. “A large-scale run on deposits, once under way, would make capital controls pretty much unavoidable,” and that that “the authorities may start by forcing state-controlled companies to sell foreign assets and repatriate funds”.
In last Wednesday’s latest speech from the US Fed, the central bank sounded upbeat noting that key indicators were performing well such as the unemployment rate in the US which now stands at 5.9%, its lowest level in 12 years.
For most of the year the Fed reiterated that rates will be on hold for a “considerable time” after the conclusion of their stimulus program they began several years back to breathe some life into the economy.
“If incoming information indicates faster progress toward the committee’s employment and inflation objectives than the committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated,” the bank noted
When pressed on the exact timing of an Interest rate rise, and what she meant by a couple, Fed Chair Janet Yellen told a news conference
“So, a “couple,” I believe, the dictionary probably says a “couple means two” Which now has analysts predicting a rate hike in April of next year.
CPI numbers from the US came in at 1.7% last week against a consensus of 1.6% and well below the Fed’s target of 2%.
This may be one of the stumbling blocks for the Federal Reserve to delay lifting rates a little longer if Inflation continues to fall short of expectations.
In the latest RBA minutes meeting last week the bank reiterated they would like to see a period of stability in Interest rates pushing aside speculation of a rate cut next year.
Most analysts predict that the Australian central bank won’t have lift interest rates in Australia if the currency falls to around US75 cents without any intervention by the central bank.
More worrying signs emerged for the Chinese economy last week as the HSBC flash PMI for China hit the market coming in slightly under analyst’s expectations. The latest number came in at 49.5 against a consensus of 50 adding more evidence of a slowdown in the world’s second largest economy. A number under 50 is generally seen as a contraction.