Australia: S&P rating announcement impact to prove fleeting - MUFG

Lee Hardman, Currency Analyst at MUFG, suggests that in the current environment, the cautious Fed is unlikely to resume rates hikes until at least the end of this year.

Key Quotes

“The market is even more dovish as it is not expecting the Fed to resume rate hikes until 2018. With market expectations already so dovish it should help to dampen US dollar downside potential in the near-term unless the market’s perception of recession risk in the US increases more materially. 

High yielding currencies such as the Australian and New Zealand dollars should continue to outperform in the near-term as carry conditions remain favourable. The enemy of carry trades which is financial market volatility has only increased modestly since the Brexit vote.

The Australian dollar has been hit overnight by the announcement from S&P has placed Australia’s AAA-credit rating on negative watch, although it should prove short-lived. S&P stated that their decision reflected their view that “the prospects for improvements in budgetary performance have weakened following the election outcome”. The Aussie still remains an attractive high yielding currency.”