The rally in the AUD/USD in response to strong US employment data seems paradoxical. The US economy is strong, the Fed is on the verge of raising the federal funds rate, yet the aussie is outperforming the greenback. Why? Let’s discuss the reasons behind this divergence and develop a trading plan.
The article covers the following subjects:
Major Takeaways
- AI could boost the Australian economy.
- The aussie benefits from its status as a commodity currency.
- The Australian economy has accelerated to 2.1%.
- As long as the AUD/USD pair remains above 0.717, the focus is on buying.
Weekly Fundamental Forecast for Australian Dollar
Investors fear that hyperscalers’ massive spending on AI technology may not pay off and that the AI boom in the US is a thing of the past. In reality, however, it has not disappeared—it has migrated from one continent to another, from the US to Australia, where investment growth in the sector could exceed 2% of GDP. This helps explain the unexpected rally in the AUD/USD following the impressive US jobs report.
Share of AI Expenditures in Australia’s GDP
Source: Bloomberg.
While the aussie rose in the first quarter on the back of a Reserve Bank rate hike, a rally in global stock indices, and a strengthening Chinese yuan, AUD/USD bulls are pushing the price higher thanks to an entirely new set of key advantages.
According to Bloomberg Economics, the AI data center boom in Australia may push demand beyond the economy’s capacity. This could fuel inflation and force the RBA to tighten monetary policy aggressively. The process is already well underway, as evidenced by the acceleration in GDP growth in the second quarter to 0.4% q/q and 2.1% y/y. The latter figure exceeds not only the consensus forecast of 1.8% but also the Reserve Bank’s estimate of 1.9%.
Australian GDP
Source: Bloomberg.
As a result, the derivatives market has raised the probability of the RBA tightening monetary policy in late September to 50%. The odds that the cash rate will rise from the current 4.35% to 4.6% in November stand at 80%.
Artificial intelligence isn’t the aussie’s main advantage. The crisis in the Middle East is driving up prices not only for oil but also for other commodities. The aussie is a commodity currency, so the higher Brent crude and commodity indices rise, the more favorable the environment is for the AUD/USD pair. This factor helps explain the Canadian dollar’s strength despite the trade war with the US, as well as the New Zealand dollar’s resilience despite the upcoming elections and the potential end of the RBNZ’s rate-hiking cycle.
Spread and Yields on US and Chinese Bonds
Source: Bloomberg.
The stability of the yuan—despite the US-China debt market yield spread nearing historic highs—and the S&P 500’s reluctance to stray far from its record high are currently supporting the Australian dollar, but they are not driving its rally. The rally is fundamentally driven by the AI boom, the Australian dollar’s status as a commodity currency, and renewed expectations that the RBA will tighten monetary policy.
Weekly AUDUSD Trading Plan
In the short term, the AUD/USD pair will depend on the US inflation data for August. As the aussie gains new drivers, investors tend to buy the dips. This is exactly what happened following the US jobs report. As long as the aussie remains above 0.717, consider opening long positions on pullbacks.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of AUDUSD in real time mode
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