The Australian dollar is getting smoked, tumbling to the lowest level in nearly a year

  • The AUD/USD tumbled to a one-year low on Tuesday, weighed down by a resurgent US dollar.
  • The US Federal Reserve will release its May interest rate decision later today — no change is expected.
  • Major economic data will also be released in New Zealand and in Europe.

The selloff in the Australian dollar accelerated on Tuesday, dropping below key support to a fresh one-year low.

The move was driven by another surge in the US dollar index which jumped to a four-month high, leaving it unchanged for the year.

Here’s the Australian dollar scoreboard as at 7am AEST.

AUD/USD 0.7491 , -0.004 , -0.53%
AUD/JPY 82.28 , -0.03 , -0.04%
AUD/CNH 4.7468 , -0.008 , -0.17%
AUD/EUR 0.6246 , 0.0012 , 0.19%
AUD/GBP 0.5501 , 0.0033 , 0.60%
AUD/NZD 1.0692 , -0.0008 , -0.07%
AUD/CAD 0.9625 , -0.0039 , -0.40%

As seen in the scoreboard below, the theme of the session was once again broad-based US dollar strength, seeing the Aussie fall heavily against the greenback but trade mixed against the major crosses.

Along with thin market conditions due to many European markets being closed for May Day holidays, the US dollar was supported by a rise in US bond yields during the session.

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“The US 10-year treasury yield rose from 2.95% to 2.98%, while 2-year yields rose from 2.49% to 2.51% — the highest since December 2008,” said Westpac’s FX Strategy team.

“The US dollar rose to a fresh four-month high, partly helped by higher interest rates.”

The recovery in the US dollar index (DXY) can be seen clearly in the daily chart below. The DXY rose above its 200-day moving average during the session, leaving it poised to test the high of 92.64 hit on January 9.

DXY Daily Chart

While positioning ahead of the US Federal Reserve’s May interest rate decision may have contributed to the move in both US bond yields and dollar, Greg McKenna, Chief Market Strategist at AxiTrader, said the move followed the release of the latest US ISM manufacturing PMI report which revealed US inflationary pressures continued to build in April.

“While the overall ISM index dropped from 59.3 in March to 57.3 in April, it also showed a 1.2 point increase in prices paid to 79.3 — the highest since 2011,” McKenna said.

“The key here is there are rising cost pressures that are likely to bubble to the surface and force the Fed’s hand as the course of 2018 progresses.”

The rally in the US dollar placed further pressure on the Aussie dollar, seeing the AUD/USD fall below key support at .7500, leaving it at the lowest level since June 6, 2017.

AUD/USD Daily Chart

The AUD/USD has now lost 8% since late January, including over 4% in just the past eight sessions.

Westpac’s FX strategy team thinks there’s further downside to come.

“The Aussie remains pricey compared to short-term fair value estimates,” it says.

“Yield differentials along the curve continue to move steadily in the US dollar’s favour, but the more notable move in recent weeks is the slide in commodity prices, including a 20% drop in spot iron ore in March. Optimism over global growth is being challenged by US-driven trade tensions which pose downside risks to global trade volumes and the AUD.

“We look for 0.7400 by the end of December.”

McKenna, too, thinks the Aussie’s break of support could herald further downside pressure.

“AUD/USD is now through the December 2017 low and the May 2017 low of 0.7424 looks to be the next target,” he says.

Whether that transpires or not, at least in the short-term, will largely be determined by the tone of the US Fed’s May FOMC policy statement that will be released later in today’s session.

“The FOMC policy decision is expected to be on hold and confirm a June hike,” says Westpac’s FX strategy team. “[Its] assessment of the recent Q1 GDP print will be interesting as will its reaction to the upside surprise to the employment cost index.”

The decision will be released at 4am AEST. There will be no press conference or economic forecasts released on this occasion.

Before that event arrives, there’s also a smattering of data releases scheduled both in Asia and Europe.

At 8.45am AEST, New Zealand Q1 unemployment data will be released. According to Thomson Reuters, economists expect the unemployment rate to remain steady at 4.5% with employment tipped to increase by 0.4%.

Wage pressures are likely to remain muted.

Elsewhere, a swathe of PMI reports will be released in Asia and Europe, including from Japan, South Korea, India, China, Germany, France and the eurozone.

Preliminary Q1 GDP data from the Eurozone will arrive at 7pm AEST — quarterly growth of 0.4% is expected leaving the change on a year earlier at 2.5% — while eurozone unemployment data will also be released.

Ahead of Friday’s US non-farm payrolls report for April, the ADP private sector payrolls report will also arrive during the session.

An increase of 200,000 is expected, down from 241,000 in March.

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