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A weak US dollar has been one of the key drivers of the AUD/USD two-year highs around 0.74. But US dollar sentiment has picked up in recent days and the greenback is on track for its first weekly gain since June. Global sentiment is set to drive the aussie in the week ahead, according to economists at Westpac.

Key quotes

“The Federal Reserve adopted a new policy framework that should mean that it keeps interest rates very low for even longer than previously thought. This lack of yield support for the US dollar seems likely to weigh on it for some time. But short-term, the US dollar has found support from a few different sources. One is relative growth prospects. The latest US data suggests less damage than expected from businesses having to shut their doors once again in response to the virus.”

“After its meeting on Tuesday, the RBA noted the Aussie’s rally but pointed out the strength of commodity prices as well as the US dollar’s broad-based decline. However, while the RBA kept interest rates on hold at 0.25%, it expanded its facility which provides cheap funding to banks on the condition that they increase lending to businesses. The RBA also said it would quote ‘consider how further monetary measures could support the recovery.’ So perhaps this will weigh on the Aussie in coming months.”

“Australia’s key economic data release was of course Q2 GDP. The 7% fall was close to expectations, as consumer spending slumped with a wide range of businesses closed due to the pandemic. The Australian economy is 6.3% smaller than a year ago, a much sharper fall than in previous recessions. However, it is not nearly as dramatic as in other nations such as the US, which is down about 9%.”

“In the week ahead, we will see updates on Australian business and consumer confidence but the global mood is likely to be key. On the positive side, iron ore prices are up to $130 per tonne as Australia continues to record trade surpluses.”

“But equity markets are a wild card. The Aussie’s highs this week lined up with record highs for global equities. But the selloff later in the week knocked the Aussie down to 0.7250.”

 

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