The Australian dollar’s implied volatility may rise along with that for the euro and New Zealand’s kiwi because the Federal Reserve’s interest-rate guidance lacked clarity, Commonwealth Bank of Australia said.
The Federal Open Market Committee this week severed a link between the benchmark rate and a specific level of joblessness, saying its assessment takes into account a “wide range of information,” including the labor market, expectations of inflation and financial markets. Fed Chair Janet Yellen signaled the key rate may rise by the middle of next year. The lack of clarity may increase currency volatility for some pairs and boost risk aversion, Joseph Capurso, a Sydney-based currency strategist at Commonwealth Bank, wrote in a note yesterday.
“The vagueness of the new guidance means there is potential for markets to ‘over-react’ in coming months by bringing forward the pricing for funds rate hikes and/or price additional funds rate hikes over and above what FOMC policy makers want,” he wrote. “Increased uncertainty about the FOMC’s reaction function may lead to more volatility in asset markets, including higher implied volatility on U.S. dollar pairs,” such as the Aussie, kiwi and euro, he wrote.
Australia’s dollar was little changed this week at 90.37 U.S. cents as of 10:59 a.m. in Sydney. It fell 0.9 percent on the day of the Fed decision. One-month implied volatility in the currency was at 9.03 percent, compared with last year’s high of 15.5 on June 24, which came after the previous Fed chairman signaled a dialing back in stimulus may be near.
New Zealand’s dollar is also little changed this week at 85.30 U.S. cents while the euro has declined 1 percent to $1.3779.
“The Fed’s vagueness has the potential to cause another bout of market risk aversion along the lines, but less sharp, as the May-September 2013 ‘taper tantrum’,” Capurso wrote.
Then-Fed Chair Ben S. Bernanke suggested May 22 that policy makers may taper the amount of money they pump into the economy, causing the U.S. dollar to strengthen as bond yields climbed and riskier assets sold off.
The Aussie has risen 1.4 percent this year against major developed peers, following a 13 percent drop in 2013, according to Bloomberg Correlation Weighted Indexes. The kiwi is up 4.1 percent since Dec. 31 and the euro has gained 0.2 percent.