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Commodities Back the Aussie Bounce

AUD/USD finally broke out last week, trading above 0.7700 for the first time since 23 March. The jump occurred amid a broad-based fall in the US dollar, but commodities and Australia’s strong economic data provide fundamental support to the Aussie.
Commodities back the Aussie bounce

After 2 or 3 weeks of trading very tight ranges, AUD/USD finally broke out last week, trading above 0.7700 for the first time since 23 March. The jump occurred in offshore trade, amid a broad-based fall in the US dollar.

Indeed the greenback fell against all G10 currencies over the week. This came as US Treasury yields fell to 1 month lows despite a huge borrowing program and ongoing strong US economic data. The fall in US yields raises the prospect of a resumption of the US dollar weakness that was so pronounced in H2 2020.

Still, while a soft US dollar may have been the catalyst for the AUD/USD range-break, the Aussie is also higher against many other currencies and we can point to some factors supporting sentiment.

Most notably, Australia’s 3 key data releases last week were all very strong. Job creation in March was twice as fast as expected, up about 71,000, trimming the unemployment rate from 5.8% to 5.6% despite a record high participation rate of 66.3%. This followed the remarkable 6.2% jump in April Westpac consumer sentiment to a high since 2010 and the booming March NAB business survey. This showed confidence at +15 versus a long term average of +6 and a stunning +25 on business conditions, a record high for the monthly series which began in 1997.

Of course, some caution is warranted particularly with any data that will be impacted by the expiration of the JobKeeper program on 28 March, most obviously April employment, due 20 May.

Commodity prices are also lending support to the Aussie. Westpac’s basket of Australia’s key commodity prices rose to highs since January, led by iron ore which rallied to multi-week highs around $177/tonne. Also heading higher were coal (both thermal and coking), liquefied natural gas and copper. China reported a soft 0.6%qtr rise in GDP in Q1 but March industrial production was still up 14.1% versus March 2020, with steel output growing quickly.

In the background, it is also helpful for the Aussie to have equities rising once more, the MSCI World Index and the US S&P 500 finishing the week at record highs. Equities will remain in close focus in the week ahead, with US earnings season in full swing.

Australia’s calendar is reasonably light, with RBA minutes to elaborate on their firmly on-hold policy stance and retail sales worth watching but prone to distortions from e.g. the Brisbane mini-lockdown and a switch in consumer spending to services not covered by the retail survey. Whether AUD/USD can extend its rally to above 0.7800 probably depends on whether the US dollar can reverse its weak start to the quarter.

Event risk this week

US Q1 earnings reports (all week), RBA April meeting minutes, UK Feb unemployment, NZ dairy auction (Tue), Aust Mar retail sales, NZ Q1 CPI, UK Mar CPI, Bank of Canada policy meeting (Wed), ECB policy decision, US weekly jobless claims (Thu), Japan, Eurozone, US ‘flash’ April Markit manufacturing and services PMIs, UK Mar retail sales (Fri)

Westpac Banking Corporationhttps://www.westpac.com.au/
Past performance is not a reliable indicator of future performance. The forecasts given above are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the forecasts are based are reasonable, the forecasts may be affected by incorrect assumptions or by known or unknown risks and uncertainties. The results ultimately achieved may differ substantially from these forecasts.

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