Date: 01 Mar 2018

Australian Q4 business investment data may have under-shot forecasts on Thursday but the importance of the figure arguably lies more in the broader narrative it supports rather than in any specific inherent importance. The Australian dollar (AUDUSD) has been the beneficiary of a positive carry for a long time. The relatively tighter monetary policy and higher benchmark policy rate of the Reserve Bank of Australia (RBA) as compared to its peer in the United States has previously appealed to investors.

But that yield erosion in favour of the AUD versus the USD has steadily been eroded recently both as the RBA, with its eye on the domestic economic situation in Australia, seems in no apparent rush to hike while the Federal Reserve (and with markets awaiting Fed Chief Jerome Powell who will be speaking in the US Senate today at 1500GMT) is seemingly becoming yet more convinced of the need for continued gradual rises in US interest rates. As this yield differential erosion has eroded, it has naturally led the currency market to reassess its view of the drivers of AUDUSD. Today’s Aussie investment data saw downward pressure on the AUDUSD and a dip to 0.7717, yet that’s still some way above the 0.7501 level that printed in December. How the AUD fares in the immediate future may well hinge on Powell’s words on Capitol Hill later today and on Friday’s US economic data.  In the case of Powell, if the Fed Chief sticks to the same message as Tuesday, a message seen as a mite more hawkish by markets, that could weigh on AUDUSD. If Powell dials back a little, the US dollar could lose a little of its poise and AUDUSD catch a bounce. But it will have not escaped the notice of traders that AUD underperformance in AUDUSD isn’t just a function of the USD side of the equation. The price moves in EURAUD, GBPAUD and AUDNZD, looking back to where those pairs were trading in October 2017, all point to less investor appetite for the Aussie.

Written by Neal Kimberley, External Currency Analyst.