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  • AUD/USD rallied above 0.7900 on Monday for the first time in three years.
  • The currency pair is being boosted by higher Iron ore, copper and gold prices.
  • Higher Australian government bond yields and more hawkish money market pricing is also likely helping AUD.

After briefly popping above the big figure during Asia Pacific trading hours, AUD/USD has moved back to the north of the 0.7900 level to set fresh three-year highs. Aussie bulls will have their sights set firmly on the 0.8000 level – the last time the pair was above this was February 2018. A break above this key psychological area of resistance would open the door to a test of 2018 highs at 0.8136.

The pair has been on the front foot since the start of European trading hours, coinciding with a broad weakening of the US dollar against most of its major G10 counterparts, which happened despite choppiness in global equity and bond markets. At present, the pair trades with gains of about 0.5% on the day, with the Aussie one of the best performing G10 currencies in the world.

Driving the day

Intraday price action in AUD/USD has mostly mirrored that of broader USD flows, with the AUD/USD chart for the most part looking like a mirror image of the Dollar Index (DXY). Despite the fact that markets have been bring forward their bets on when the Fed is going to start hiking interest rates again (markets now expect a hike by the end of 2022, despite Fed guidance of no hikes through 2023) and despite the recent move higher in real and nominal US bond yields, USD has not been able to break out to the upside of its recent trading range and versus currencies such as the Aussie, is at its weakest in years.

Indeed, much of the above-noted market moves (i.e. money markets bringing forward rate hike bets and bond yields rallying) is as a result of growing expectations for inflation, which stand to benefit commodity export-dependent currencies such as AUD. Indeed, on Monday, the prices of a number of Australia’s key commodity exports have received a solid boost; the price for spot iron ore with 62% iron content for delivery to China rallied to fresh post-Covid-19 highs at $177 per tonne during the Asia Pacific session, Copper futures on the London Metals Exchange rallied above $9000 per tonne for the first time since 2011 and spot gold prices currently trade higher by about 1.5% and back above the $1800 level. These three commodities, along with fossil fuels such as petroleum and natural gas, make up a large percentage of total Australian exports each year. Thus, strength in these commodities on Monday has driven strength in the Aussie.

Note too that AUD might itself be garnering support from a recent rally in Australian bond yields; the Australia 10-year yield shot above the 1.60% mark on Monday during Asia Pacific trade, a move of more than 15bps on the day. The 3-year yield also moved further above the RBA’s 0.1% target, in a sign that the recent move higher in bond yields is likely to present a challenge to the bank’s aim of maintaining accommodative monetary conditions. The RBA has signalled that it will not be lifting rates until 2023, but despite this (and much like in the US), money markets now place a 30% chance on rates being lifted by the middle of 2022.

Looking ahead, comments from Fed Chair Jerome Powell and Fed Vice Chair Richard Clarida on Tuesday and Wednesday respectively will be closely followed in the context of how the Fed’s two key decision-makers view recent moves in bond yields and whether anything should be done about it and, if so, what could be done about it. Influential FOMC member and NY Fed President John Williams said he was not concerned about the recent move higher in bond yields, an opinion Powell and Clarida might well also both espouse. However, analysts note a risk that the two Fed members might opt to “jawbone” yields lower (via the threat of tweaks to the bank’s QE programme), which would be likely to weaken USD and probably prop up risk assets such as stocks. US data will play second fiddle to Fed speakers.

In terms of Australian economic events to watch out for this week; Wage Price Index data for Q4 2020 will be released at 00:30GMT on Wednesday, but for the most part, AUD will be trading as a function of global risk appetite, USD flows and in correlation to its key commodity exports (i.e. Iron, Copper, Gold and oil prices).


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