AUSTRALIAN DOLLAR FUNDAMENTAL FORECAST: NEUTRAL
- Australian Dollar losses some ground to strengthening US Dollar
- Rising longer-dated Treasury yields, rising CPI bets boosting USD
- This is offsetting some upside Aussie potential from rising equities
The growth-linked Australian Dollar spent most of its time past week trading lower against the anti-risk US Dollar. This is despite a recovery in risk appetite as the S&P 500 pushed higher, though the Aussie regained some strength into the end of the week. There are two fundamental dynamics that may have been contributing to AUD/USD’s performance as of late which will likely remain important to watch going forward.
The first comes from the Reserve Bank of Australia, which unexpectedly extended its government bond purchasing program. This was a relatively dovish shift for the central bank. Such measures tend to depress returns on bond yields on the front-end of the maturity spectrum. Once you start looking at those that are further out, such as Australia’s 10-year or 20-year rate, the opposite has actually been prevailing.
This has also been prevalent at more closely-watched US Treasuries. In fact, the 30-year government bond yield touched its highest since February 21, 2020. Meanwhile, the 10-year breakeven rate touched its highest since May 2018, indicating investors are pricing in increasingly higher inflation down the road. This may be due to local fiscal stimulus expectations, which appear to be benefitting the Greenback.
President Joe Biden has been pushing ahead with trying to pass through a US$1.9 trillion Covid-relief package without Republican support through budget reconciliation. Last week’s relatively disappointing local non-farm payrolls report undermined the case for more support. It is thus unsurprising to have seen the US Dollar give up some of its gains on the data, offering the Aussie a chance to recover some of its lost ground.
The week ahead is relatively quieter, with the most prevalent data from Australian business and consumer confidence. In the United States, the next inflation report and University of Michigan sentiment will cross the wires. This is as vaccination rates have been on the rise as daily Covid infections come in at slowing rates. On Wednesday, all eyes are on Fed Chair Jerome Powell where he hosts a webinar.
With that in mind, rising yields from the world’s largest economy may continue to offer some upside pressure for the Greenback as markets continue betting on a recovery. Thus, it could offset some upside potential from the Australian Dollar in the event equities continue rising.