Westpac: Multi-Month Risk Of AUD/USD Returning To $0.69

Westpac note that “the Aussie has fallen against all but the Kiwi in G10 FX so far this year. U.S. inflation at 7% and unemployment at 4% have markets pricing a risk of a 50bp Fed hike in March. This should underpin the U.S. dollar despite occasional wobbles, helping cap AUD/USD rallies around $0.72. While 10-Year AU/U.S. yield spreads are range-bound, the 2-Year continues to trend in the US dollar’s favour. The February RBA meeting was in line with our view for the first rate rise to be delivered in August, as it wrapped up QE and welcomed the fall in unemployment but reserved judgement on the sustainability of the rise in core inflation. The Aussie’s commodity price support has strengthened, with the RBA commodity index surging 31% Y/Y in January, following 4 years of monthly trade surpluses. A strong USD, somewhat dovish RBA and skittish equities suggest multi-week risks for a return to the $0.69 handle or (briefly) lower, but the Aussie should be on more solid footing in Q2.”