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  • AUD/USD witnessed some heavy selling on Friday and tumbled to over one-week lows.
  • A sharp spike in the US bond yields boosted the USD and exerted pressure on the pair.
  • The risk-on mood limited losses for the perceived riskier aussie, only for the time being.

The AUD/USD pair trimmed a part of its intraday losses to over one-week lows and was last seen trading around the 0.7615-20 region, still down 0.50% for the day.

The pair continued with its struggle to make it through the 0.7660-70 supply zone and witnessed some heavy selling on the last trading day of the week. The sharp intraday slide of over 70 pips was sponsored by a cautious tone seen in the RBA’s Financial Stability Report (FSR) and resurgent US dollar demand.

In its semi-annual report on financial stability, the RBA raised concerns about a debt-fuelled surge in house prices. This, along with mixed Chinese inflation figures, weighed on the aussie. The data indicated that the post-pandemic recovery in domestic consumption is yet to pick up pace in the world’s second-largest economy.

On the other hand, a sharp intraday surge in the US Treasury bond yields allowed the USD to stage a solid rebound from over two-week lows. Despite a stubbornly dovish Fed, the market has been pricing in a rate hike by the end of 2020 amid the prospects for a relatively faster US economic recovery from the pandemic.

The optimistic US economic outlook remained well supported by the impressive pace of coronavirus vaccinations and US President Joe Biden’s over $2 trillion infrastructure spending plan. This has been fueling speculations about an uptick in US inflation and raised doubts that the Fed will retain ultra-low interest rates.

Meanwhile, the underlying bullish sentiment in the financial markets capped any further gains for the safe-haven USD. This, in turn, assisted the AUD/USD pair to rebound around 25-30 pips from the daily swing lows, near the 0.7590-85 region. That said, the near-term bias remains tilted firmly in favour of bearish traders.

Another selloff in the US fixed income market could raise fears of distressed selling in other assets classes. This might should act as a headwind for the equity markets and drive flows away from the perceived riskier Australian dollar. This suggests that the path of least resistance for the AUD/USD pair remains to the downside.

Technical levels to watch