AUD/USD rallies back above 0.7750, making most of soft US dollar conditions

AUD/USD has rallied from session lows in the 0.7220s to trade back in the green and above the 0.7750 mark on the final trading day of the week. At current levels in the 0.7750s, the pair trades within striking distance of weekly highs of just above 0.7770, set on Thursday.

Driving the day

The main factor driving AUD/USD higher on Friday has been US dollar flows, or rather, a broad reversal in the US dollar’s fortunes following its strong performance during the Asia Pacific and early European sessions. Why has the US dollar declined?

No theme or piece of news, in particular, has been behind the move on Friday, but the fact that the current global political and economic backdrop remains positive for risk appetite is likely weighing; 1) pandemic news has been good (data from Israel shows remarkable efficacy of the vaccines and vaccination rollouts continue at a pace whilst infection rates are dropping), 2) US fiscal stimulus news has been good (Senate Democrats are likely to bypass the Committee stage thus fast-tracking the Biden administration’s $1.9T package towards bring signed as early as 14 March) and 3) central bank’s (namely the Fed) continue to reassure that their ultra-accommodative monetary policy stances aren’t going to change any time soon (Fed Chair Jerome Powell and other Fed member have come across as very dovish this week).

As a result of the above, global stocks equities continue to at or close to cycle (or all-time) highs, commodities remain underpinned (in fact, crude oil is absolutely gunning it to the upside to finish the week in a flurry). This has not been a good environment for safe-haven assets which probably partly explains why USD has not been performing so well. Bonds have been selling off on Friday in the US and in Europe as a result of the lack of demand for haven assets and as a result of higher inflation expectations. Higher nominal yields have not helped the US dollar that much, largely given real yields have not rallied nearly as much (real yields being the real bond market driver of USD).

AUD performing well

AUD currently stands as the second-best performing G10 currency on the day and is the best performing G10 currency on the week, despite news that Melbourne has returned back into a snap lockdown for five days. The currency continues to derive support from the strong performance of base metals, iron ore and energy, as well as from the broadly still risk on market environment. Meanwhile, the Australian Finance Minister was bullish on the economy earlier in the week, which also boosted sentiment.