Aussie finds buyers at dips versus the US dollar

Aussie finds buyers at dips versus the US dollar

The AUDUSD traded above the 0.80 level for the first time in almost four months on Wednesday. The US dollar weakness is the major driver of the positive trend since the pair hit a bottom, 0.7501, in December. The question is how far could the Aussie advance against the US dollar given that the Reserve Bank of Australia (RBA) remains cautious regarding its monetary policy?

In September 2017, the AUDUSD failed to extend gains beyond the 0.8125 level. Could the Aussie be expected to gather more momentum this time? It is possible, yet there are barriers. Back in September and all the way to December, the underlying AU/US yield spread was clearly playing against the AUD-long positions. In fact, the 2-year AU yield started diving in September after hitting the highest level in 2017, while in the meantime, the US 2-year yield began a steep rise. As such, the AU/US 2-year spread turned negative in the beginning of November and stayed in the negative territory until the end of December, although the differential slowly shrank through November as the AU yields recovered to catch up with the US yields. During this period, the Aussie was steadily sold to 0.75 level against the greenback.

Today, the 2-year AU/US yield spread is slightly positive, though the Aussie yields have been volatile versus a remarkably steady rise in the US yields to the levels last seen in 2008. On the other hand, the Aussie yields stagnate at record low levels – in line with the RBA’s record low interest rate policy. Therefore, the Aussie yields have potential for a 30-50 basis point rise ceteris paribus.

On the other hand, it is important to note that at the moment, the US yields are not only powered by the hawkish Federal Reserve (Fed) expectations yet also the uncertainties on the US government’s debt ceiling and the risk of a government shutdown. Japanese and Chinese US debt holdings fell to the lowest level since 2000. The lack of appetite in US debt holdings explains a part of the steep rise in the US yields. In this perspective, the high US yields may be a barrier to the US dollar appreciation versus the Aussie. This would allow the Aussie to re-test the 0.8125-resistance and make an attempt above this level. However, the buyers may become gradually rare as the Aussie appreciates, because the RBA will more likely than not keep the interest rates at the low levels in the foreseeable future, whereas the Fed is expected to continue hiking rates gradually over the next two years. Hence, the Aussie-dollar rate differential will likely remain little satisfying for the carry traders in the medium term.

The Aussie edged lower in Sydney on the back of a mixed bag of data on Thursday. The Australian economy added 34.7K jobs in December, down from 63.6K printed a month earlier (revised), yet more than twice the 15K expected by analysts, even though more than half of the jobs were part-time jobs. The unemployment rate deteriorated to 5.5% from 5.4% previously. The AUDUSD saw support by the 100-hour moving average (0.7942). More support is eyed by 0.7935 (lower Bollinger band on hourly chart). With a mixed USD sentiment, the AUDUSD could be expected to recover toward 0.8012/0.8022 (upper Bollinger bands / January 17 high) and 0.8080 (upper Bollinger band on daily chart). Intermediate resistance is eyed prior to the 0.80-hurdle.

Big drop in US crude inventories

The US weekly crude inventories dropped by 5.121 million barrels last week according to the latest API data. This has been the seventh large drop in inventories in seven weeks. The tightening oil inventories keep the price of WTI crude near $64 per barrel. The more official EIA data is due today. Analysts penciled in an expectation of 1.4-million-barrel drop versus -4.9 million a week earlier. A larger-than-expected drop could bring in the buyers after two-day slide. The trend and momentum indicators on hourly chart turn positive suggesting that the market could be preparing for another attempt on the $65/barrel resistance. Support is eyed at $63.20/63.00 (January 16 low / 200-hour moving average). A break below this level could encourage a further slide to $62.70 and $61.40 (minor 23.6% and major 38.2% retracement on December – January rise).