Australia’s highest credit rating and strong bond yields make the Australian dollar a highly attractive safe-haven asset. This increases its appeal compared to its competitors. Let’s discuss this topic and make a trading plan for the AUD/USD pair.
The article covers the following subjects:
Major Takeaways
- The Australian dollar is outperforming its G10 counterparts.
- The RBA may raise rates as early as February.
- The bond market is supporting the aussie.
- Long positions on the AUD/USD pair can be considered with a target of 0.72.
Monthly Fundamental Forecast for Australian Dollar
When the US dollar loses ground, the euro becomes strong but fragile, and the yen becomes cheap but risky, there is no better alternative than the Australian dollar. Since the beginning of the year, it has risen by 5% and ranks second among more than three dozen of the most liquid currencies on Forex, trailing only the Brazilian real. The aussie’s status as a high-yield refuge and expectations that the RBA will increase the cash rate for the first time since February 2023 have pushed AUD/USD quotes above 0.7.
Australia has the highest credit rating, and its 10-year bond yields have soared to a 26-month high amid positive macroeconomic statistics and market confidence in the RBA’s monetary policy tightening. Unemployment falling to 4.1% and employment rising to 65,200 in December, coupled with inflation accelerating to 3.4% and services prices to 4.1%, raised the chances of a key rate hike in February from 33% to 60%.
AUD/USD Performance and Australia-US 10-Year Bond Yield Spread
Source: Bloomberg.
The yield spread between Australian and US bonds has widened to a three-year high, leading to capital flows from the United States to Australia and supporting a solid foundation for the AUD/USD pair’s rally.
The Australian dollar is buoyed by rising commodity prices and high global risk appetite. The S&P 500 index hit a record high for the first time in two weeks on expectations of positive corporate earnings from tech giants. At the same time, the shift in the US stock market from fear to greed has boosted the AUD/USD pair. The fact is that the aussie is sensitive to the VIX index.
AUD/USD Rate and VIX Index
Source: Bloomberg.
Indeed, such a rapid rally in AUD/USD quotes would not have happened if it were not for the weakness of the US dollar. Concerns among investors about coordinated currency intervention by Washington and Tokyo to strengthen the yen against the greenback, as well as verbal interventions by Donald Trump, who welcomed a weaker US currency, sent the USD index tumbling to a nearly four-year low.
Profit-taking after a sharp rally ahead of January’s FOMC meeting forced AUD/USD bulls to retreat. The Australian dollar took a step back, but is ready to resume its rally at any moment. Aussie bulls have so many growth drivers that it is unclear what could stop them.
Monthly AUDUSD Trading Plan
Long positions opened on the AUD/USD pair at the beginning of December proved to be a sound strategy. The pair managed to reach the first of two bullish targets of 0.695 and 0.705 and came within arm’s reach of the second target during the week. Against this backdrop, the aussie can be purchased on pullbacks with the target of 0.72.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of AUDUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance broker. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2014/65/EU.
According to copyright law, this article is considered intellectual property, which includes a prohibition on copying and distributing it without consent.