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The Australian dollar is exploding higher

Photo: Shutterstock.

The Australian dollar rebounded strongly overnight, buoyed by broad-based US dollar weakness and, as a consequence, surging commodity prices.

As of 8.15am AEDT, the AUD/USD buys 0.7553, up 2% from lows seen earlier in the session.

The catalyst for the substantial move was significant caution from the US Federal Reserve at its latest monetary policy meeting, with the FOMC lowering its expectations for rate hikes this year from four to two. That, along with downgrades to its economic forecasts, led to the substantial losses in the US dollar and strength in risk assets, including the Australian dollar.

That is shown in the 5-minute tick chart below. As soon as the Fed policy statement and updated economic forecasts hit, the Aussie screeched higher in response.

Richard Franulovich, Westpac’s New York based G10 FX macro strategist, suggests the significant downgrade to US rate expectations will likely boost risk assets in the coming days, if not weeks.

“There are many more dovish leaning signals on balance however and the USD has been hit hard,” said Franulovich. “The USD will struggle near term as markets grapple with diminished odds of a June hike. Today’s more dovish Fed message, coming in the wake of strong dovish signals from the BoJ and the ECB, should underwrite risk assets in coming days, if not weeks.”

As a widely regarded barometer of investor risk appetite, the Australian dollar is likely to be at the top of that list.

Whether the Aussie’s overnight surge will accelerate today or slow to a crawl will largely be determined by the performance of Australia’s February jobs report, scheduled for release at 11.30am AEDT.

Rodrigo Catril, currency strategist at the NAB, suggests markets should pay more attention to the unemployment rate rather than the headline jobs figure.

“The market consensus is for the unemployment rate to be unchanged at 6.0% and for employment growth to be 13,500. NAB expects the unemployment rate to fall to 5.9% and for employment to print stronger at 18,000,” says Catril.

“The market is currently pricing around 21bps of RBA rate cuts over the coming year and when considering the global and local risks, pricing is probably more vulnerable to a weaker than expected employment print rather than a strong one. For the AUD, we would note that the unemployment rate should have the more enduring impact relative to the change in employment, even if the latter continues to draw the initial response – a result of ‘algorithmic traders’ programming to react to any significant surprise on headline employment.”

Given its proximity to the level, a strong jobs outcome could see traders target the Aussie’s recent high of 0.7593 struck on March 14. A break of that level could see the Aussie extend its gains even further, something the NAB suggested was a strong possibility earlier in the week.

A full preview of today’s jobs report can be accessed here.

Here’s the current Australian dollar scoreboard.

  • AUD/USD 0.7553 , 0.0005 , 0.07%
  • AUD/JPY 85.05 , 0.08 , 0.09%
  • AUD/CNH 4.9001 , 0.0062 , 0.13%
  • AUD/EUR 0.6731 , 0.0009 , 0.13%
  • AUD/GBP 0.5300 , 0.0008 , 0.15%
  • AUD/NZD 1.1229 , 0.0007 , 0.06%

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