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Aussie intermarket: investors to take the plunge, chase the yield and push Aussie higher?

Currently, AUD/USD is trading at 0.7632, down -0.66% on the day, having posted a daily high at 0.7685 and low at 0.7629.

Trump trade in jeopardy, could lead to the hunt for yield in the carry

AUD/USD has been flexing its muscles yet again at the start of the week, maintaining its title as the best performer across the G10’s this year to date so far in the absence of dollar bulls. The greenback is under pressure this year in the wake of Trump’s controversial presidency and lack of conviction of his authority in the White House when it comes to his executive orders being blocked left right and centre and arguably as being non-constitutional, certainly in respect of the travel ban imposed on seven nations that the Courts have blocked and ruled against. That coupled with the lack of instant pro-business reforms, markets are losing confidence and indeed the Wall Street party seems to have come to a sudden halt with the Dow Jones losing sight of 20,000 and the S&P meeting a blockade at 2300.

Risk-off, spike in volatility, DXY struggles, commodities lead Aussie higher

Risk-off trade was the theme to start the week in Asia and is continuing throughout European trade, perhaps due to nervousness around the up and coming elections. We are seeing another flight to safety with a rally in bonds and a jump in the VIX that indicates people are looking to protect themselves. However, commodities can continue higher while the DXY struggles to hold onto the 100 handle. Copper is regaining some ground at the time of writing and could lead the Aussie higher and out of its correction from the highs of 0.7689, especially if the dollar were to break below S1 99.48. S2 99.20 (4 pips below the 2017 low) ahead of 98.85 (S3). 

Fed/RBA divergence could be the roadblock ahead for Aussie bulls

While this is all a fundamentally bullish case for the Aussie so far, analysts at Westpac warn and remind us of the divergence between the RBA and Fed. “With commodity prices supportive and the RBA comfortably on hold, we could see AUD/USD probe higher. But the upside is limited. Fed officials sound convinced about the need to raise interest rates 3 times this year, which should see the US dollar stabilise.”

The Fed’s fund rate has picked up to 159.40, the highest level for this month so far, yet well below 164.13 where it was at the start of this year. Meanwhile, in respect the RBA meeting this week on the 7th, Reuters have surveyed 63 economists on the Reserve Bank of Australia meeting Tuesday (February 7) – Every one of them says the Bank will hold rates steady at that meeting. The current cash rate is 1.5%.

AUD/USD levels

Analysts at Commerzbank offer their bullish outlooks:

Short Term Trend (1-3 weeks): Immediately bid above 0.7512.

Long-term trend (1-3 months): Erosion of the 2013-2017 resistance line suggests further upside scope to the 0.7836/50 2016 high.

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