Energy Burst Boosts Markets. Can it Drive AUD/USD Up?

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The Australian Dollar tailwinds build as risk sentiment rollicks aroundCommodities have boosted the bottom line as demand outstrips supplyLong end yields on the rise: will 10-year AU-US spreads impact AUD/USD?

The Australian Dollar found firmer footing this week as markets overlooked their woes.

The US government debt ceiling circus rolled on and down the road as the issue was pushed out to December. That saw risk appetite increase going into the end of the week. The market seemed to forget their concerns around inflation, rocketing energy prices and Chinese crackdowns amid property companies collapsing.

Inflation was building as an issue before energy prices went ballistic and now the thought of it being transitory is being questioned by some and ridiculed by others. US 10-year inflation ticked up toward 2.5% on this and back-end yields across the G-10 have risen.

The Australian-US 10-year government bond spread has moved to be over 5 basis points in favour Australian debt. The AUD/USD has historically had a high correlation to this spread and the direction of this yield differential may play a role in Australian Dollar movement. Past performance is no guarantee of future performance.

Early in the week, Australia’s trade surplus came in at AUD 15.8 billion, well above the AUD 10 billion the market had anticipated. The iron ore price has stabilised since the mid-September low, but oil, coal and liquified natural gas (LNG) have maintained extraordinary gains to underpin AUD/USD.

The RBA left monetary policy unchanged on Tuesday, as expected. However, the Australian Prudential Regulation Authority (APRA) raised the hurdle rate for home borrowers by 0.5% on Wednesday. This means that a lending bank needs to make sure that a borrower can cover a 3% interest rate increase rather than 2.5% previously.

Like many economies in an environment of super loose fiscal and monetary policy, home prices have been a runaway train in Australia. The move by APRA is seen as a subtle attempt to rein in the loose caboose without impacting the macro picture.

China have been on holiday for Golden Week and came back on Friday for a strong September PMI services number of 53.4 against 49.2 forecast. Markets will be watching the PBOC for liquidity measures and any movement in the reserve requirement ratio (RRR).

Looking ahead, Tuesday will see Australian business and consumer confidence numbers, followed by jobs data on Thursday


Australian Dollar Outlook: Energy Burst Boosts Markets. Can it Drive AUD/USD Up?

Chart created in TradingView

— Written by Daniel McCarthy, Strategist for

To contact Daniel, use the comments section below or @DanMcCathyFX on Twitter

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