The Australian dollar fell modestly against the greenback to start the week, succumbing to a spike in US bond yields and profit-taking ahead of key market events later in the week.
However, as seen in the scoreboard below as at 7.50am AEDT, while the Aussie fell against the USD, it gained against most of the major crosses.
AUD/USD 0.8095 , -0.0014 , -0.17%
AUD/JPY 88.16 , 0.11 , 0.12%
AUD/CNH 5.1292 , 0.0022 , 0.04%
AUD/EUR 0.6535 , 0.0011 , 0.17%
AUD/GBP 0.5751 , 0.0029 , 0.51%
AUD/NZD 1.1054 , 0.0037 , 0.34%
AUD/CAD 0.9982 , -0.0002 , -0.02%
Elliot Clarke and Imre Speizer, Strategists at Westpac, said speculation that the US Federal Reserve could deliver a hawkish January monetary policy statement later in the week contributed to a spike in US bond yields, helping to lift the US dollar after weeks of selling pressure.
US 10-year treasury yields initially rose from 2.66% to 2.73% — the highest level since Apr 2014. 2-year treasury yields rose from 2.12% to 2.16% — the highest since Sep 2008 — but later retraced after tame PCE inflation data.
US core PCE inflation — the Fed’s preferred measure of gauging price pressures — rose by 1.5% in the 12 months to December, in line with market expectations and unchanged from the level reported in November.
It remains below the Fed’s 2% inflation target.
“The core PCE deflator has been below the Fed’s 2% objective since May 2012, reinforcing expectations the FOMC’s interest rate normalisation process will remain gradual,” said Elias Haddad, Senior Currency Strategist at the Commonwealth Bank.
“Fed funds futures are discounting almost three 25 basis point rate hikes for 2018.”
Fed fund futures currently price the odds of a 25 basis point rate hike from the Fed in March at 76%.
Along with profit-taking ahead of major economic events that will arrive over the next few days, the spike in US bond yields sparked a reversal in the US dollar against all major currencies during the session, including the Aussie dollar.
However, while the Aussie softened to start the week, Haddad of the Commonwealth Bank doesn’t think the weakness will last.
“AUD/USD has scope to lift this week in part because of favourable Australian inflation developments and encouraging Chinese economic activity,” he says.
“We expect Australia’s policy-relevant Q4 underlying CPI inflation to increase by 0.5% [on Wednesday]. This would be above the RBA’s November 2017 projection of 1.75%.
“In China, the January manufacturing PMI is expected to remain above the 50 threshold consistent with expansion [on Wednesday].”
Before those data points arrive tomorrow, the main focus point today in Australia will be the release of the National Australia Bank’s December business confidence report at 11.30am AEDT.
“[It] will likely remain at levels consistent with encouraging economic activity which is AUD supportive,” says Haddad.
Outside of Australia, New Zealand will release trade data for December while retail sales, unemployment and household spending data from Japan will be released between 10.30am to 10.50am AEDT.
Later in the session, the data calendar goes up a notch or two with preliminary Q4 GDP figures from the Eurozone and German consumer price inflation data for January the undisputed headline acts.
US house price, consumer confidence and weekly crude oil inventory data from the API will also be released.
Finally, Bank of England Governor Carney will also appear before the UK’s Economic Affairs Committee.