Australian dollar yield benefit looks finished

The Australian dollar has held up well against its US counterpart in recent weeks but things may be about to change as the US Federal Reserve gears up to hike interest rates next month.

Towards the end of las year, rumors spread that the Reserve Bank of Australia would begin hiking rates this year which would have kept the cash rate in Australia above rates in the US but recent data has shown the Australian economy is not ready for higher rates,

“We see no reason to change our view that the Aussie cash rate will remain on hold in 2018 and 2019. Early this year markets were fully priced for a hike by Dec 2018 but after the muted Q4 CPI and equity turbulence are now back to about 60% chance,” says Sean Callow, head of G10 FX strategy at Westpac.

Next months expected rates hike from the Fed will interest rates on par with Australia at 1.5 percent which hasn’t been seen in over a decade.

The Fed is expected to raise rates at least 4 times this year which would put them well above rates in Australia and give investors little reason to hold Australian dollars so the risk for a large pullback is growing by the day.

The Aussie dollar has enjoyed immense support over the past decade as one of the highest yielding currencies in the world but for now this benefit looks well and truly over.