The Australian dollar lifted again Friday night despite local economic woes attached Dictator Dan’s renewed Melbourne lockdown. The main reason for it was a soft US dollar. The USD Index should keep falling for a while yet. It is under pressure from the global recovery and it usually falls as US recoveries gain strength as well as capital flows outwards to higher return jurisdictions.
Another reason for that ongoing weakness in DXY today is that falling real yields, from MUFG:
The US dollar has rebounded modestly and the risk-on tone of recent days has reversed somewhat. With a lot of Asia closed for Chinese New Year trading conditions were not at usual levels. Japan markets traded today but were close to unchanged. The standout headline that may explain the slight underperformance ofAUD was that Melbourne, where the Australian Open tennis is being played,is entering a snap five-day lockdown after an outbreak of the highly infectious UK strain of COVID. Melbourne in Australia’s 2ndmost populous city and experience in general points to such short lockdowns not having the desired effect, so risks are high that this could turn into something more serious. AUD/USD reaction so far has been quite modest so there are certainly short-term risks the drop could extend further.
But the key global macro focus for the markets will remain the signs of progress of the fiscal stimulus package in the US. Developments this week certainly point to the prospect of President Biden’s USD 1.9trn package remaining more intact than previously assumed and possibly getting legislated in quicker time. Yesterday, the house Ways and Means Committee approved measures providing USD 594bn in benefits included in Biden’s bill covering the USD 1,400 stimulus cheques plus advance tax credits for children. These components were passed along party lines in 24-18 vote.Twelve different House committees are working to clear different elements of the package with an aim to vote on the full package during the week of 22nd February. This would increase the prospects of House Speaker Nancy Pelosi’starget of legislating the stimulus package by mid-March, when the current temporary lift to jobless benefits expire. Stimulus cheques was one area we thought would probably be caught for compromise so the fact that it has passed the Ways and Means committee is a sign that this component and the overall package will be larger than what the markets were assuming just a few weeks ago. The USD 15 p/hr minimum wage legislation has also been pushed through the committee stage but it remains unclear whether that will survive in the Senate under budget reconciliation. Still, we are clearly headed for a larger package than assumed just a few weeks ago which is set to ensure the momentum behind the global reflation trade is given a further lift. When this is coupled with the strong communication from Fed ChairPowell this week on maintaining the current aggressive policy easing, we expect this mix to keep the US dollar on a weaker footing over the coming weeks.
By comparison, Aussie real yields will rise as inflation remains weak and the curve steep.
Credit Suisse offers some technicals:
Further upside is expected post a short-term pauseAUDUSD has not managed to see a closing break above resistance at .7761/72, keeping the currency pair within its recent consolidation range for now. Nevertheless, with a bullish“reversal day” in place and daily MACD momentum breaking higher again (in addition to a long-term “head and shoulders” base still in place), we look for further upside and a break of the aforementioned .7761/72 in due course. Beyond here would negate the prior bearish “reversal day” and expose .7782, where we would expect to see fresh sellers at first. Above here can see a fresh test of the April 2018 and current 2021high at.7816/20, which could also prove a tougher barrier to break at first. Nevertheless, only above here would reassert the core bull uptrend for .7917 next. Support moves initially to .7734, then.7713/00–the recent lows and a key near-term average–which we look to hold above.Beneath here though could see a move back to .7651, beneath which would ease the immediate upside pressure and see .7630next, where we would expect to see another attempt to hold. Next key resistance is seen at .7782, above which could open the door to .7816/20. Support moves to .7613/00.
BofA has a wrap on where this ends that I agree with:
Despite EURUSD meeting expectations in 1Q, Athanasios Vamvakidis and team have revised their forecast to 1.15 by year-end, down from 1.25 previously.
• They see a few reasons for USD strength this year, including monetary policy divergence, massive US fiscal stimulus, US decoupling, short USD positioning and a challenging risk outlook.
• However, uncertainties remain high. Major risks to their forecasts include a dovish Fed for longer, EU reforms towards fiscal union, US long-term debt concerns and excessive US tax hikes.
That is, once into H2, as China begins to slow and European recovery faces headwinds for 2022, an outperforming US recovery will bring back the DXY bid as real rates rise.
I still see the AUD higher into the low 80s later this year before DXY turns higher.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
