AUD/USD: towards new annual lows for the Australian dollar

Pressure mounts on Australian dollar as US bond yields rise

Pressure on the Australian dollar has resurfaced since the publication of inflation figures in the United States. AUD/USD is under pressure and is coming back to test its recent low at around $0.6670 amid rising Fed rate hike expectations. Indeed, operators revised their expectations of a Fed rate hike upwards following the stronger than expected acceleration in core inflation in the United States. The market is now torn between a 75 and 100 basis point rate hike at the next Fed meeting compared to a 50 to 75 basis point hike prior to the inflation release.

As a result, the yield spread between Australian and US government bonds is narrowing. While the Australian 2-year rate was 20 basis points higher than the US 2-year rate in mid-June, it is now 55 basis points lower. International investors therefore favor US bonds over Australian bonds, which puts pressure on the Australian dollar and supports the greenback.

The Australian dollar is also hurt by the deterioration in the global economy. The Australian dollar, like the euro or other net exporting economies, tends to underperform when the global economic outlook deteriorates. Conversely, safe haven currencies such as the franc or the greenback tend to be favored in this environment.

AUD/USD weekly price chart – key levels


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