AUD/USD supported by commodity prices - Westpac

AUD/USD probed above 0.80 last week for the first time since September 2017 and one source of support has been commodity prices, according to Sean Callow, Research Analyst at Westpac.

Key Quotes

“Westpac’s index of Australia’s export-weighted commodity price basket has bounced around 5% since mid-December, though iron ore prices have pulled back in recent sessions.”

“Australia’s data momentum this year has been largely positive too – at least after the return to trade deficits. Retail sales, consumer sentiment, building and home loan approvals and now employment have all been strong. Indeed Australian employment growth has accelerated from 0.9%yr in February to 3.3%yr in December. In comparison, the US’s hot job market grew only 1.4% in 2017.”

“Little wonder then that money markets have become more confident about the RBA raising the cash rate this year. A hike to 1.75% is fully priced by November, plus a 50% chance of another hike by Feb 2019. Yet global yields have marched higher together over the past month, including an extra 25bp or so on the US 2 year T-note. As a result, the Aussie’s traditional yield premium over the US dollar has been effectively wiped out in the cash rate-sensitive 2 year area.”

“This suggests AUD/USD has been heavily reliant on broad-based USD weakness to drive its 4% gain over the past month.”