The Aussie was full of Christmas cheer as December commenced, reaching a 6 month high against sterling. In Santa’s sack was some respectable Australian economic data, which showed stronger activity in the manufacturing sector, continuing growth in retail sales and faster growth in gross domestic product. He may as well have delivered the dovish news that the RBA would keep rates on hold until at least February, such was the positive impact it had on the currency – the GBP/AUD exchange rate was pushed to 2.0352.
Lurking around the corner was the Grinch in the form of ECB President Mario Draghi who, in contrast to his recent rhetoric, announced that the central bank wouldn’t be increasing the amount of money injected into the eurozone economy each month, under their quantitative easing programme. As speculation mounted in recent weeks that the bond-buying scheme would be expanded in December, investors were inclined to sell off their euros and buy commodity currencies such as the Australian dollar, for profit purposes. However, this sharp U-turn saw investors reverse their positions as the ECB under delivered. This served to more than halve the Aussies earlier gains.
The Australian dollar came under further downward pressure following a dramatic slump in commodity prices. Fresh signals of slowing demand from China prompted base metal prices to slide, with iron ore in particular plunging to its lowest value in a decade.
Positive employment figures led to a period of volatility for the currency, with GBP/AUD exchange rates shifting almost 4 cents from high to low. The official unemployment figure was expected to show a drop to 6% but the actual figure of 5.8% was healthier than expected, and helped boost market confidence in the Aussie.
One of the most widely expected decisions by a central bank in recent times, saw the US Federal Reserve raise the range of its benchmark interest rate by a quarter of a percentage point to between 0.25 per cent and 0.50 per cent. In doing so the central bank made the US the first country in the western world since the financial crisis to raise interest rates. The Australian dollar fell as low as 71.77 US cents – a loss of one cent – after the announcement, but then quickly recovered thanks to the FED’s accompanying statement about future policy, which suggested that any further rate rises were likely to be “gradual”, and dependent on the rate of inflation.
The Aussie managed to defy falls in oil prices and weakness in US stocks thanks to negative UK and US data. UK Public Sector Net Borrowing rose from £6.7 billion to £13.6 billion, surpassing the forecast £11.1 billion deficit. And the UK’s GDP forecast dropped from 2.3% to 2.1% year-on-year (YoY). Faltering US Durable Goods orders, with no growth posted for November after the rate of 2.9% in October, saw the US Dollar weaken. Consequently the Australian dollar picked up one US cent, as well as the three and a half cents it took from sterling.
The Aussie held steady during the stagnant holiday period, with scant economic data or events driving price action, as we bid farewell to 2015.
Looking ahead to 2016, the impact of falling commodity prices is likely to catch up with the Australian Dollar, which has so far managed to remain remarkably impervious to drops in the price of key Australian exports.
RBA interest rate announcements will be closely monitored, with Australia predicted to be the third modern economy, after the US and the UK, to raise interest rates – although we could see a tightening of monetary policy towards the end of the year before this occurs.