- AUD/USD has dropped back to the 0.7750 mark from session highs above 0.7800 amid strong USD conditions.
- Concerns regarding China mulling rare earth export restrictions to the US may also have weighed on the Aussie.
AUD/USD has been on the back foot since the arrival of US market participants at 11:00GMT following their long weekend. The pair had managed to surpass the 0.7800 level on two occasions during the Asia Pacific and European morning sessions, its highest levels since mid-January, but is now trading just to the north of the 0.7250 mark. At present, AUD trades around 0.3% lower on the day versus the US dollar.
Buoyant buck
AUD/USD downside is primarily being driven by flows into the USD on Tuesday. The buck was given a boost by the release of a much stronger than forecast NY Empire State Manufacturing Index survey (the headline number jumped to 12.1 in February versus expectations for a much more modest rise to 6.0 from 3.5 in January). The Dollar Index got a noticeable boost from the data, helping launch it back above 90.50.
The strong survey bodes well for the Philadelphia Fed Manufacturing survey and Markit PMI report set to be released on Thursday and Friday respectively this week. With Covid-19 infection rates in the US dropping sharply and precipitating further reopening, the impact of January stimulus starting to be felt and expectations for further fiscal stimulus ahead, US economic data is set to improve over the coming months.
Moreover, there is a lot of focus on rising US bond yields on Tuesday and this is also giving USD a boost; the 10-year yield is up over 8bps on the day to above 1.28%, whilst the 30-year yield is up a similar margin and now above 2.08%. Real yields are also rising, with the net effect being a favourable shift in the attractiveness of holding cash in USD versus other currencies.
US equity futures had been trading higher since the start of the week and when US cash equity markets opened for the first time this week at 14:30GMT, all three major US indices opened at all-time high levels. However, rising US bond yields raises the relative attractiveness of investing in the bond market versus the stock market and the extent of Tuesday’s yield rally appears to be weighing on the stock market. Given AUD’s positive correlation to equities, this is another reason why AUD should be lower on the day.
US/China tensions
Turning away from risk appetite and USD dynamics, US/China relations have been in the spotlight on Tuesday, with the FT reporting that China is mulling placing restrictions on rare earth mineral exports to the US in order to hit US defence companies. At the moment, China controls a large majority of global rare earth mineral production. The move is unlikely to go down well with the Biden administration, who have themselves seemingly opted to continue the previous Trump administration’s shift towards a tougher stance on China. AUD and the currencies of other China export dependant countries are vulnerable to any further flareups in US/China relations.
Aussie fundamentals
Finally, taking a quick look at AUD relevant fundamental developments down under; the RBA released the minutes of its January meeting (where it opted to extend its QE programme). As expected, consensus on the board remains that accommodative policy remains necessary. Arguments were made against the premature tapering of the bank’s asset purchase programme given that this would provoke strength in the Australian dollar that might negatively impact exporters. This focus on avoiding doing anything that might provoke AUD strength may encourage the bank to stay dovish for longer than expected and could weigh on the Aussie going forward.
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