#SaxoStrats: Greenback rally could drive AUDUSD lower
The US dollar strengthened sharply in the wake of Federal Reserve chair Janet Yellen’s speech at the Jackson Hole symposium, as the Fed appears more willing to hike rates than was previously thought likely by the market.
- A further upgrade of the Fed’s hiking potential will be necessary if this week’s US data are reasonably positive, particularly Friday’s US jobs report.
- AUD has been a recent beneficiary of the “reach for yield” theme that has seen investors piling into long-duration bonds and even stocks. The AUD is one of the last developed market currencies with a policy rate above 1% and the market is desperate for every bit of yield it can get, but Friday, the hawkish Fed saw US interest rates spiking higher (bonds weaker) and risk appetites souring. Friday’s speech could herald the end of the reach for yield theme.
- Rate spreads have recently dramatically favored the USD over the AUD as the market prices in rate cuts for the Reserve Bank of Australia while now catching up to price in higher odds of rate hikes for the Fed.
- USD inter-bank funding rates have been rising ahead of key legislative changes to the US money market in October and could rise further.
- Technically, the outside day bearish engulfing reversal is the technical development that has bears looking lower here for the currency pair, together with the fall of local support around and below the 0.7600 area.
Management and risk description
Volatility risk, or too tight a stop placement, is one risk. Others include US data that could see the USD weaker, whether today’s PCE inflation report for July, Thursday’s ISM Manufacturing Survey, or Friday’s US jobs report.
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Entry: sell short at 0.7550-75.
Time horizon: approximately two weeks, though we could reassess if nothing is happening ahead of the RBA meeting next Tuesday.
— Edited by Michael McKenna