AUD/USD: watching US yields expected to cap rallies - Westpac

Analysts at Westpac explained that AUD/USD is flat over the past week, after trading a range of only about 1.2 cents, the narrowest weekly range since early April. 

Key Quotes:

"AUD is showing signs of strength against other currencies, with its fundamental support looking more solid."

"We heard plenty from the RBA last week. Westpac continues to expect a steady cash rate through both 2018 and 2019 and the wages and unemployment data left us even more comfortable with that view. In Q1, wages grew less than expected, up just 0.5%qtr and remained at 2.1%yr. Private sector wages growth stayed at a mere 1.9%. And while the 23,000 increase in April employment was decent enough, an increase in labour force participation meant that the unemployment rate rose from 5.5% to 5.6%."

"Governor Lowe has said that unless wages growth accelerates, it is difficult to see the RBA hitting its inflation target of 2 to 3%. In addition, the federal budget forecasts are underpinned by wages growth assumed to rise to 3.5% by 2020/21. Yet the Budget also contains an assumption that the unemployment rate probably has to fall below 5% to spark a pickup in wages growth. But neither the RBA nor government expects unemployment to fall to 5%, let alone below."

"Such an outlook reinforces the case against higher interest rates in Australia, with markets pricing only about a 15% chance of a rate rise by end-2018. This means yield differentials continue to favour the US dollar. Over the past week we saw the US 10 year Treasury bond yield reach highs since 2011, above 3.1%. If this continues in the months ahead, it will limit any Aussie dollar rallies against the greenback."