The Australian dollar is flying

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  • The Australian dollar is soaring, rising to a two-month high against the greenback on Wednesday.
  • A slightly hotter-than-expected Australian Q4 CPI reading, soaring iron ore and crude oil prices and dovish commentary from the US Federal Reserve were the catalysts behind the 1%-plus surge seen.
  • The data and events calendar is busy on Thursday. The headline acts are Chinese PMIs for January and Eurozone Q4 GDP. Trade talks between the US and China will also continue.

The Australian dollar is flying in late trade on Wednesday, boosted by a slightly hotter-than-expected Australian CPI reading, soaring iron ore and crude oil prices and broad-based US dollar weakness.

The scoreboard below at 8.25am in Sydney tells the story of the session.

AUD/USD 0.7253 , 0.01 , 1.40%
AUD/JPY 79.03 , 0.79 , 1.01%
AUD/CNH 4.8694 , 0.0431 , 0.89%
AUD/EUR 0.6315 , 0.0059 , 0.94%
AUD/GBP 0.5530 , 0.0056 , 1.02%
AUD/NZD 1.0509 , 0.0047 , 0.45%
AUD/CAD 0.9536 , 0.0042 , 0.44%

After opening trade at .7153, the upside momentum in the AUD/USD kicked off following the release of Australia’s Q4 CPI report.

While underlying inflation, at 0.4% for the quarter and 1.75% for the year, printed in line with market expectations, the headline CPI figure came in slightly hotter-than-expected, lifting by 0.5% in the three months to December and 1.8% over the year.

“The price action suggests the market was positioned for a soft outcome,” said Rodrigo Catril, Senior FX Strategist at the National Australia Bank.

Along with a modest rally in the offshore traded Chinese yuan in Asia, that saw the AUD/USD lift back to .7200, a level it remained until late North American trade.

The Aussie’s next tailwind was provided by the US Federal Reserve’s January monetary policy statement that confirmed that it’s not in any rush to tighten policy settings further.

“The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2% objective as the most likely outcomes,” the FOMC said in its statement.

“In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.”

In a separate statement, the FOMC also acknowledged that it is “prepared to adjust” the details of balance sheet normalisation, if required, adding that it is “revising its earlier guidance regarding the conditions under which it could adjust the details of its balance sheet normalization program”.

The dovish tweaks to the outlook for the funds rate and balance sheet normalisation were cheered by investors, seeing the AUD/USD jump to as high as .7273, a level not seen since early December last year.

“It seems the Fed has listened to markets and is watching the global outlook closely with a ‘muted’ inflation outlook allowing the Fed to be ‘patient’ in determining future rate moves,” said Catril at the NAB.

Big gains in iron ore and crude oil prices were another factor that helped the Aussie to the top of the G10 FX leader board on Wednesday.

AUD/USD Hourly Chart

Turning to the day ahead, it promises to be another busy one for traders with several major data releases scheduled.

The highlight in Asia will be the release of China’s manufacturing and non-manufacturing PMIs for January at 12pm AEDT.

Elsewhere, Australian private sector credit data for December, along with industrial production, housing starts and construction orders from Japan, will also be on the radar.

Later in the session, the data-flow will go up a notch or two with German retail sales and unemployment, CPI from France and Spain, Eurozone Q4 GDP and unemployment, Canadian GDP and employee costs, jobless claims and Chicago Fed PMI from the US the headline acts.

On the monetary policy front, Mersch, Weidmann and Coeure from the ECB and Wilkins from the Bank of Canada will also be in action.

Trade talks between the US and China will also continue, creating the potential for headline-driven, or perhaps Tweet-driven, volatility in the latter parts of the session.