Analysts at Westpac explained that AUD/USD probed above 0.80 last week for the first time since September 2017.
“One clear source of support has been commodity prices. Westpac’s index of Australia’s export-weighted commodity price basket is up about 4% since mid-December, though iron ore prices pulled back from one year highs into the end of the week.
Australia’s data momentum has been largely positive too. Retail sales, consumer sentiment, building, home loan approvals and employment have all been strong. Indeed Australian employment growth accelerated from 0.9%yr in February last year to 3.3%yr in December. In comparison, the US’s hot job market grew only 1.4% in 2017.
Little wonder then that money markets have become more confident about the RBA raising the cash rate this year. A hike to 1.75% is fully priced by November, plus a 50% chance of another hike by Feb 2019.
Yet global yields have marched higher together over the past month, including an extra 25bp or so on the US 2 year T-note. As a result, the Aussie’s traditional yield premium over the US dollar has been effectively wiped out in the cash rate-sensitive 2 year area.
This suggests AUD/USD has been heavily reliant on broad-based USD weakness to drive its 4% gain over the past month. The US Government shutdown was a factor weighing on the US dollar last week. At 12:01am Washington time on Saturday, the Government was forced to shut-down for the first time since 2013 after Republicans failed to secure the votes required to pass a short term funding bill.”