AUD/USD struggles in face of firm US dollar

AUD/USD ended Friday flat but had travelled in a range of between 0.7288 and 0.7338 in markets that are moving more concerned over persistent inflation risks. This in turn is pushing US bond yields higher, subsequently supporting the greenback despite a dismal Nonfarm Payrolls print on Friday. 

The greenback was largely unmoved by the disappointing employment report on Friday. Investors do not expect the lacklustre numbers to sway the Federal Reserve from starting a tapering of its asset purchases as early as November. The Labor Department said in its employment report on Friday that nonfarm payrolls increased by 194,000 jobs last month. Economists polled by Reuters had forecast payrolls increasing by 500,000 jobs.

To taper, or not to taper?

While the headline number was poor, analysts at ANZ Bank noted that the details were better. ''Average jobs growth this year should be sufficient to keep the Fed tapering announcement on track for next month. However, there is no doubt that the last two month’s data show a marked loss of momentum.''

The analysts also pointed towards this Wednesday's minutes of the September FOMC meeting that will be published, ''which will shed more light on the tapering debate and strategy, ie its speed and duration. We would need to see significant pushback from Fed speakers next week if the guidance for a November taper is to change. The FOMC blackout period before the Nov 2/3 FOMC meeting starts on 21 October.''

US dollar stronger for longer

Higher US rates are helping the dollar.  The 2-year yield is trading at 0.32%, the highest since March 2020, while the 10-year yield is trading 1.60%, the highest since June 4.  Moreover, US dollar net longs in the latest week surged to their highest level in more than two years, according to Reuters calculations and Commodity Futures Trading Commission data released on Friday.

''The value of the net long dollar position was $22.89 billion in the week ended Oct. 5, compared with $16.37 billion in the previous week. US dollar positioning has been net long for 12 straight weeks after being net short for 16 months,'' Reuters reported. 

Looking forward, fears that inflation will spike yet higher, and thus also become more entrenched than expected, are unlikely to ease this week. We will have the US Consumer Prices Index figures that are expected to indicate yet another increase in both headline (5.4%) and core rates (4.1%).

Australian events this week

A greater sense of caution is creeping into the global investment community with bond yields continuing to push higher with inflation expectations rising and monetary tightening in various guises becoming more prevalent. However, in Australia, the housing and jobs sector is of keen importance to the Reserve Bank of Australia. 

The RBA has long insisted that it would rely on macro-prudential measures to cool the housing market rather than the rather blunt tool of rate hikes.  At this week’s meeting, the RBA affirmed its commitment to keep rates steady until at least 2024. With that being said, this week's employment data will be closely eyed. 

''Another month of strict lockdown in NSW and VIC should lead to a dismal jobs outturn,'' analysts at TD Securities said.

''We are more bearish as firms are likely less positive on hiring based on NAB Aug biz survey. Workers may drop out of the labour force due to prolonged lockdowns, reducing the part rate to 64.5%. The sizable job losses should outweigh the effect of lower part rate driving the Unemployment Rate to 5.0%.''