Australian Dollar Moves Ahead of the US Dollar as USD Buckles

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Last week, the Australian Dollar (AUD) surged higher as the US dollar buckled beneath the weight of the market’s expectations for a less aggressive Federal Reserve.

The likelihood of China coming back online to assist the global economy caused risk asset sentiment to soar. Industrial metal prices increased, supporting the Australian dollar even more. Strong trailing indications were seen in the week’s domestic data releases, but mild leading indicators were also seen.

Retail sales for November came in at 1.4% month over month (MoM), above the forecast of 0.6% and the prior reading of -0.2%. The year-over-year figure as of the end of November was 7.4%, as opposed to the predicted 7.2% and the prior 6.9%.

The massive AU$ 13.2 billion trade surplus for November surpassed expectations of AU$ 11.3 billion and improved on the previous month’s AU$ 12.2 billion. The increase in iron ore, copper, gold, aluminum, and nickel will boost the domestic economy’s overall performance.

In contrast, month-over-month building approvals for November were -9.0%, much below the flat result predicted and the -5.6% previously. With the RBA’s rate hikes appearing to have an effect on activity, the industry could be a burden on the economy moving forward.

The carefully monitored US Dollar index (DXY), which fell to its lowest level since June of last year as the market appeared to be playing chicken with the Fed, helped the AUD/USD’s exchange rate externally.

The Fed Funds target rate will rise above what the market is now pricing in, according to many speakers who were FOMC representatives.

They added that it is doubtful that rates will be decreased this year and that rates must remain high for a considerable amount of time in order to combat inflation. A rate drop later this year is already factored in by futures.

Fundamentals Driving the Australian Dollar

The US CPI slowed down in December, which helped the Fed appear less hawkish, but the year-over-year number of 6.5% is still significantly higher than the target rate of 2%.

The release of domestic unemployment data is scheduled for Thursday, but the US dollar’s fluctuations may have a greater impact on the AUD/USD exchange rate.