AUSTRALIAN DOLLAR FORECAST: TRULLY
- The Australian dollar tailwind is built as risk sentiment rolls around
- Raw materials have increased the end result when demand exceeds supply
- Long-term return on the rise: 10-year AU-US spreads will affect AUD / USD?
The Australian dollar found a firmer footing this week as markets overlooked their misery.
The U.S. government’s roof circus rolled up and down as the issue was pushed out until December. As a result, risk appetite increased at the end of the week. The market seemed to forget their concerns about inflation, strong energy prices and Chinese crackdowns among collapsing real estate companies.
Inflation built up as an issue before energy prices became ballistic and now the idea that it is transient by some and ridiculed by others is questioned. US 10-year inflation ticked up to 2.5% on this and the backend return over the G-10 has risen.
The 10-year government bond spread between Australia and the US has moved to over 5 basis points in favor of Australian debt. AUD /USD has historically had a high correlation to this spread and the direction of this return differential may play a role in the Australian Dollar movement. Past performance is no guarantee of future results.
At the beginning of the week, Australia’s trade surplus was AUD 15.8 billion, well above the AUD 10 billion the market had expected. The price of iron ore has stabilized since mid-September low, but oilcoal and liquid natural gas (LNG) has maintained extraordinary gains to support AUD / USD.
The RBA left monetary policy unchanged on Tuesday, as expected. However, the Australian Prudential Regulation Authority (APRA) raised the barrier rate for home borrowers by 0.5% on Wednesday. This means that a lending bank must ensure that a borrower can cover an interest rate increase of 3% rather than 2.5% previously.
Like many economies in an environment of superfluous fiscal and monetary policy, house prices have been a running train in Australia. The relocation of APRA is seen as a subtle attempt to curb the loose cabin without affecting the macro image.
China has been on holiday for Golden Week and returned on Friday for a strong PMI services in September of 53.4 against 49.2 forecasts. The markets will look at the PBOC for liquidity measures and any movements in the reserve requirement ratio (RRR).
Looking ahead, Tuesday comes Australian companies and consumer confidence, followed by job data on Thursday
AUD / USD AGAINST AUSTRALIA-US 10-YEAR RETURN
Chart crepeated in TradingView
— Written by Daniel McCarthy, strategist for DailyFX.com
To contact Daniel, use the comments field below or @DanMcCathyFX on Twitter