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  • AUD/USD has remained well supported above the 0.7900 level on Tuesday.
  • Strong data, buoyant risk appetite, higher Australian bond yields and continued commodity outperformance are all helping the Aussie.

AUD/USD has remained well support above the 0.7900 level on Wednesday and is now recovering back towards Asia Pacific session highs in the 0.7940s as risk appetite takes a turn for the better (stocks and crude oil are moving higher while bond yields and the US dollar pull back from earlier highs). Markets have been focused on positive vaccine news (the US FDA moving closer to giving EUA to J&J’s one-shot vaccine), continued dovish Fed speak and US fiscal stimulus optimism, which is underpinning risk assets. But a hefty $1.2B option expiry to Wednesday’s NY Cut at 0.7910 also likely helped AUD/USD bounce from this area.

Elsewhere, commodities (apart from gold) are having a good day as the reflation trade continues; Australian Iron Ore prices rose during the Asia Pacific session, copper is on the front foot again following Tuesday’s pullback and crude oil markets are trading with on the day gains of the north of 2.0%. All remain at or close to multi-year highs, offering ongoing support to the commodity export-dependent Aussie.

Speaking of reflation, Australian bond yields continue their staggering march to the upside; 10-year yields are up more than 8bps on the day to 1.682%. That means they have rallied more than 40 bps in the last two weeks. That compares to a comparatively tame rally in the US 10-year government bond yield of about 20bps over the same time period to close to 1.40%. A widening Australian rate advantage over the likes of the US and other major developed countries (like the UK and EU) is also helping the Aussie thrive.

Australia Q4 Wage Price Index

Q4 2020 Wage Price Index data was strong and supported AUD during the Asia Pacific session. Wages rose at a faster than expected pace in Q4 2020 (up 0.6% QoQ and 1.4% YoY), a jump that was partly due to an unwinding of temporary wage cuts implemented during the pandemic. Financial markets are already pricing in a rate hike by the Reserve Bank of Australia as soon as early-2023, notes Capital Economics, who add that “today’s figures may add to the exuberance”.

However, the economic consultancy cautions, “wage growth of 0.4% (only) translates into annual wage growth of just over 1.5%… (and) the RBA has made it clear that it wants to see annual wage growth of 3 point something”. “With the share of firms reporting wage freezes rising to a record high of over 60% in Q4, that point is a long way off” they continue, before concluding that they “only expect the RBA to hike rates in 2024”.

 

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