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Chinan dollar braces for Fed impact

The n dollar is expected to land close to US71¢ if the Fed raises rates. Photo: Glenn Hunt Currency traders were nervously awaiting Thursday’s interest rate decision by the US Federal Reserve, with the n dollar expected to land close to US71¢ if the Fed raises rates.
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But a decision not to raise rates could rocket the Aussie close to US75¢, traders said.

The Fed’s decision will occur at 6am AEDST, with a briefing by Fed chair Janet Yellen at 6.30am. Most analysts are expecting a 0.25 per cent rate rise.

The n dollar was trading a tad above US72¢ on Wednesday afternoon. Commonwealth Bank currency strategist Joseph Capurso said that a rate rise by the Fed was not universally expected. “Given pricing on the interest rate market, it’s not 100 per cent priced in. It’s about three-quarters priced in,” he said.

Consequently the US dollar would rise if rates were raised, he believes.

“That will be the knee-jerk reaction. The n dollar will fall considerably under US72¢, maybe even get close to US71¢,” Mr Capurso said.

“About half an hour after the announcement, chair Yellen will have a press briefing. She’ll probably try to calm things down and I suspect you’ll get a bit of a reversal of those knee-jerk trends.” No raise, bigger reaction

If rates were kept on hold, though, the reverse would happen. “That would lead to an even bigger reaction, except it would be the opposite: the US dollar will fall maybe 2 or 3 per cent, which means the Aussie will go up close to 75¢, at least 74¢ anyway,” he said. “That would be very destabilising.”

The US Federal Reserve has not changed the official cash rate, which is in a band between 0 per cent and 0.25 per cent, since December 2008.

However, IG market analyst Evan Lucas said bond and money markets had “completely priced in” the rate hike expected by the Fed, “settling themselves in-line with where the effective Fed funds rate will settle at 6am tomorrow.

“Explaining exactly how the Fed raises and lowers rates would have this note balloon into a 100-page thesis, but in short, the papers that need to move rates higher have moved rapidly in the past two weeks,” Mr Lucas said.

“Short dated T-Bills, the commercial papers complex, the government collateralised weekly repo rate and the one-week LIBOR rate have all moved in unison by rapidly shifting their respective rates higher.”

Mr Lucas said the GC weekly repo and the one-week LIBOR are sitting at 0.375 per cent, having being at 0.18 per cent and 0.12 per cent respectively on December 1.

He said, “0.37 per cent is exactly what economists see the Fed funds rate being raised to, therefore it has been factored in.”

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