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  • AUD/USD has broken back above 0.7300 ahead of the release of the crucial Q4 Australia 2020 GDP update.
  • AUD has outperformed most of its G10 rivals on Tuesday in wake of a more optimistic RBA.

AUD/USD has broken back to the north of resistance in the form of the early January highs at 0.7820 and currently trades around the 0.7830 mark ahead of the release of the crucial Q4 2020 GDP update. The pair, which has benefitted from a combination of US dollar weakness and post-RBA tailwinds, looks set to end Tuesday FX trade with gains of about 0.8% or 60 pips on the day and is the best performer in the G10.

Tuesday’s gains mean that AUD/USD has already rallied more than 1.5% on the week. Not bad, though, when compared to the 3.2% drop in the last two days of last week, not enough to get the pair anywhere near back in the region of its recent highs. That doesn’t mean that a recovery back to last week’s 0.8000 highs is out of the realm of possibility, with a number of tier-one US economic events incoming this week that could really shake things up for FX markets;

Wednesday sees the release of the ISM Services PMI report for February, a timely update on the state of the US’ service sector recovery, as well as February’s ADP National Employment Change estimate, a release that helps set expectations for the NFP release later in the week. Thursday sees Fed Chair Jerome Powell (expected to reiterate the dovish Fed script whilst now showing any concerns about rising bond yields) plus Weekly Jobless Claims numbers and Friday sees the release of the February Labour Market Report, which will be the main event of the week from a global macro perspective. Silver prices are likely to be choppy as a function of USD.

RBA, Aussie Data Recap

As expected, the Reserve Bank of Australia left its main policy settings untouched at Tuesday’s monetary policy decision; the Cast Rate Target and 3-year Australian Government bond yield targets were held at 0.1% and the bank left its QE remit unchanged at AUD 100B. Moreover, as expected, the RBA reiterated its prior guidance that it does not expect to start hiking interest rates until 2024, given that the bank expects it to take this long for the labour market to tighten and for wage growth to pick up significantly, and reiterated that it will not lift rates until inflation is sustainably back within its 2-3% target range.

On the outlook for the economy, the RBA came across as a little more confident, saying “the outlook for the global economy has improved over recent months due to the ongoing rollout of vaccines… While the path ahead is likely to remain bumpy and uneven, there are better prospects for a sustained recovery than there were a few months ago”. Note that this comment is being cited as behind Aussie outperformance on Tuesday.

Note also that the RBA sent a strong message to markets that it is committed to its target of keeping 3-year bond yields at 0.1% – these comments come against a backdrop of the recent rise in global yields that had started to lift the 3-year yield above the RBA’s target, only for the bank to enter the market in size on Monday to keep 3-year yields under control (the bank bought AUD 3B in 3-year government bonds). Note that given the above, and given that the RBA’s AUD 100B QE programme will be exhausted by the end of August, Capital Economics expect the bank to increase the size of its QE programme by another AUD 100B, perhaps at the June meeting.

Elsewhere, Australian data was mixed, with Net Exports Contribution to GDP falling 0.1% QoQ in Q4 2020, less than the expected 0.3% drop and the Q4 2020 Current Account Balance coming in a little stronger than expected at AUD 14.5B (forecasts were for AUD 13.1B), but January Building Approvals seeing a huge miss on expectations, down 19.4% MoM in January versus forecasts for a drop of 3.0%. AUD seemed not to have paid too much attention to last night’s data, with focus much more on the latest from the RBA.

GDP data incoming

Australian Q4 2020 GDP growth data is set for release at 00:30GMT on Wednesday. The QoQ rate of economic growth in the country is expected to moderate to 2.5% from 3.3% in Q3. A 2.5% QoQ expansion in the final quarter of the year is expected to leave the economy 1.8% smaller in 2020 than it was 2019, an improvement from the 3.8% drop in economic activity on the year prior seen in Q3. The continued strength of the Australian economic recovery is expected despite an unwinding of government stimulus in Q4. ANZ elaborates; “in the December quarter, the economy weathered a sharp drop-off in fiscal support, with JobKeeper payments lowered and eligibility tightened, and the Boosting Cashflow for Employers program ending… But the strength in the partial data has been promising: a 2.5% QoQ gain in retail sales suggests that spending has held up well despite the large reduction in stimulus in the quarter… (and) labour market data has also been encouraging, with employment and hours worked rising solidly”.


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