AUD/USD elevated around weekly highs with one eye on the Fed

Markets are quiet due to the Thanksgiving public holiday with equity and bond markets closed which leaves the Aussie consolidated around the weekly highs.

At the time of writing, AUD/USD is trading at 0.7366 having travelled din a narrow 0.7353 and 0.7374 range. 

It has been a positive period for risk-fx due to the combination of the vaccine news, the beginning of the Biden transition, the Janet Yellen news plus a weaker US dollar.

In turn, the pile-up of positives has been particularly helpful in the commodities markets, for which AUD is correlated. 

The CRB Index is trading towards the 2020 highs, breaking a 61.8% Fibonacci retracement of this year's decline, boosted by the better than expected EIA inventory data which helped crude markets push sharply higher. 

Iron ore prices have also continued to inch higher amid the positive outlook for China’s steel market and the broader economy. 

Turning to equities, with the Dow above 30,000 and the S&P500 closing at a fresh all-time high, Asian markets were encouraged which took the ASX up 0.59% to a fresh 9-month high in the middle of this week. 

The latest coronavirus updates and the News that Queensland was allowing Victorians to enter the state from Dec 1 without quarantining added to the positive mood this week also. 

We can expect a quiet Asian session ahead to round off the holiday ending the week with positive risk sentiment providing cover for near-term AUD consolidation.

Eyes on the Fed

Looking forward, in a low inflationary environment, the focus will be on the central banks and the divergence between, say, the Reserve Bank of Australia and the Federal Reserve.

Few central banks would welcome a stronger currency going forward in this current climate.

However, ''given the Fed’s arsenal, the other central banks may continue to find themselves fighting fire in terms of preventing their currencies strengthen against the USD,'' analysts at Rabobank explained. 

''The extent to which the Fed is willing to use additional policy measures going forward is likely to be crucial in determining how far the USD can fall.'' 

An additional supporting factor for the Aussie is that the Asia-Pacific region is leading the global economic recovery due to better control of the pandemic in that region.

The analysts at Rabobank noted this and explained that the ''expectation that the Fed is willing to extend asset purchases is likely to maintain the pressure on the greenback.''

''To change this outlook, US data will have to improve at a better pace than its counterparts and US real interest rates will have to rise.''

The minutes of the last meeting sent a clear signal that, "fairly soon," the FOMC statement will include "qualitative outcome-based guidance for asset purchases that links the horizon over which the Committee anticipates it would be conducting asset purchases to economic conditions. 

''We believe "fairly soon" means Dec. 16.'' analysts at TD Securities said. 

Therefore, the December 15-16 FOMC meeting will be a critical event for AUD/USD.

''We believe the case for more easing is stronger now than it was at the time of the FOMC meeting three weeks ago,'' analysts at TD Securities argued.

''We expect it will strengthen further in the next three weeks.''

AUD/USD levels