AUD/USD bulls eye move back above 0.7800 mark

AUD/USD trades a little higher on Wednesday shortly after the start of US trade, the pair having climbed to the 0.7730s from Tuesday’s US session lows in the 0.7680s. Aussie bull will have their eyes firmly on a retest of this month’s multi-year highs just to the north of psychological 0.7800 level, but a move back to this area would likely require an extension of US dollar losses, which seems unlikely on Wednesday given the Dollar Index’s strong recovery in recent trade to back above the 90.50 mark. At present, the pair trades just under 0.5% higher on the day. 

Risk appetite on the front foot

Markets have maintained Tuesday’s upbeat bias for a second day; US equity markets opened in the green, European stocks are mostly in the green, crude oil markets are higher, industrial and precious metals are mostly higher. FX markets are a little more mixed, with some underperformance being seen in European FX (perhaps as more countries go into lockdown), but risk-sensitive currencies such as AUD, NZD and CAD are all trading well versus the US dollar.

In terms of the factors driving risk appetite on Wednesday; analysts are pointing to Tuesday’s testimony to the US Senate Finance Committee from US Treasury Secretary nominee Janet Yellen, where the former Fed Chairwoman urged Congress to act big with regards to fiscal stimulus and to worry about the debt later, as expected. Markets seemed to like her tone regarding how pandemic relief should come first and tax increases (primarily on the wealthy and corporations) should come later. Expectations seem to be that the Fed will continue to soak up all of this additional government debt issuance in the secondary market, evidenced by how nominal yields have hardly moved over the past few days (10-year yields started the week and still trade close to 1.10%), while real yields have dropped and inflation expectations have risen.

A closer look at the Aussie

In terms of how the above feeds into AUD; as hopes for more Fed-financed US government spending grows, boosting US economic growth and inflation expectations, this boosts commodity prices, which boosts the currencies of commodity export-dependent countries such as Australia’s AUD.

In terms of domestic driver of the Aussie; official jobs number for December, the most important data release of the month, are out at 00:30GMT on Thursday. Markets expect the Aussie economy to add 50K jobs, for the unemployment rate to drop slightly to 6.7% and for the participation rate to rise a little to 66.2%. As ever, the share that full-time job gains make up of total job gains will be important (more full-time jobs gains is seen as an indicator of economic strength).

Otherwise, Aussie focus remains on risk appetite, the pandemic, commodity prices and China; on the latter, arguably “hawkish” remarks from the incoming US Secretary of State Anthony Blinken with regards to the Biden administrations approach to China might have/might yet weigh on the US/Sino relations exposed Australian dollar.

AUD/USD key levels