Decks cleared ahead of US Fed interest rate call

The Aussie dollar was stronger today as traders squared positions ahead of a looming Fed rates decision.

The Australian dollar was stronger today as Asia shares enjoyed a third-straight day of gains, and as traders squared positions ahead of a looming decision on interest rates by the US central bank.

ANZ captured the mood in markets perfectly as the hours tick down to the Fed’s decision: “Twas the night before the FOMC, when all over the floor, not a product was stirring, not even Euribor. Positions were marked; most traders were square, in the hope that Queen Janet would say nothing there.”

At 4pm (AEST) the currency was trading at US71.86c, compared with US71.55c late yesterday.

The US Federal Reserve is debating whether to raise interest rates for the first time since 2006, which would mark a shift away from the easy monetary policy that has been in place since the financial crisis.

Bets on interest rates rising have been trimmed back over the last few weeks, with attention now fixing on the U.S. Federal Reserve’s policy meeting in December. Still, markets are guarded and the potential for market volatility ahead of the weekend is high.

Tomorrow will bring testimony by Reserve Bank of Australia Governor Glenn Stevens on the economy to parliament. The central bank’s recent communication has been mildly optimistic, but economic growth has slowed keeping bets on that it will need to cut rates further.

The governor’s comment on China will also be closely assessed. Recent weakness in China shares and currency has shone a fresh light on an ongoing slowdown in economic growth.

Some economists have said the RBA appears too relaxed about the impact of market volatility in China on Australia’s economy.

Earlier today, the Commonwealth Bank of Australia, one of the country’s biggest banks, lowered its forecasts for Chinese economic growth.

“Economic recovery in China is being delayed by continued headwinds in heavy industry, export and housing investment,” the CBA said.

CBA now forecasts China’s 2016 GDP growth to be 6.5 per cent, down from 6.9 per cent, while keeping GDP growth forecast for 2015 unchanged at 7 per cent.

“Given the supportive economic fundamentals, as well as low hanging fruit that are still available, we do not think China will fall into an economic crisis in the foreseeable future,” it added.