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Australian Dollar Outlook: What Happens Down Under, Stays Down Under

Australian Dollar Outlook: What Happens Down Under, Stays Down Under

Daniel McCarthy, Strategist

Australian Dollar Forecast: Bullish

  • The Australian Dollar has been ripped apart by external factors
  • Markets are now aware that central bankers are taking the inflation fight seriously
  • The Fed appears up for the challenge. Will that send AUD/USD lower?

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The Australian Dollar got tonked last week as the US Dollar soared again and it could be entering a new phase of ascendency.

The rise of the US Dollar reflects the apparent awakening of what the Federal Reserve has been saying all along. That is that the Federal funds target rate will be high and stay high for a long period of time in order to get rein in price pressures. 25 basis point hikes are now baked in for their next 3 meetings.

Bond markets have been pricing this in for some time, but cash markets and the equity market have been reluctant to accept the notion that the party is over. There appears to be a realisation that risk assets have been experiencing a bear-market rally.

Wall Street sold off on Friday and the Aussie Dollar got caught up in the mayhem to reflect this broader risk-off attitude.

On Friday, the core US PCE index came in at 4.7% year-on-year to the end of January against 4.3% anticipated and 4.6% previously.

This reacceleration of the Fed’s preferred measure of price pressure has re-ignited fears that the inflation genie is nowhere near being put back in the bottle and that demand needs to be crushed further than previously thought.

US interest rates are making the greenback more attractive than ever at a time when monetary policy tightening is gripping all corners of the world.

The US 2s 10s Treasury yield curve inversion has historically been a harbinger of a difficult period for risk assets. It is as inverted as it has ever been for 40-years.

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For AUD/USD, this could see further downside as the ‘big dollar’ climbs, but it will also deliver a massive boon to the domestic economy.

The trade surplus for 2023 was around AUD 140 billion. The boost to the local economy cannot be underestimated. The longer the currency remains below estimates of purchasing power parity (PPP), the longer the music keeps playing down under.

AUD/USD AGAINST TREASURY YIELDS AND 2s 10s CURVE

--- Written by Daniel McCarthy, Strategist for DailyFX.com

Please contact Daniel via @DanMcCathyFX on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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