Australian dollar outlook: watch the fed for AUD direction

The Australian dollar has started the week on the backfoot after finishing lower at the end of last week with broad-based US dollar strength sinking AUD/USD.

The unemployment rate nudged higher to 3.7% in January against the 3.5% anticipated and prior. 11.5k Australian jobs were lost in the month, which was below forecasts of 20k being added.

This might be helpful for the Reserve Bank of Australia which is battling to get inflation. RBA Governor Philip Lowe appeared before a Senate estimates committee and then he delivered his semi-annual testimony to the House of Representatives Economics committee.

There were no real surprises across the two days with some testy posturing by some politicians. His answers did have an economics 101 angle to them, generally explaining the reasons why inflation is bad for the Australian economy and society in general.

The futures market has priced in two rate hikes of 25 basis points at the central bank’s March and April meetings.

For the first time in more than three-years, the trade ministers for Australia and China are expected to hold virtual trade talks this week. It has raised hopes of a potential visit to China by Australian Prime Minister Anthony Albanese later in the year.

While an easing of tensions in the relationship would be welcomed by some Australian exporters, the trade surplus is already at a record level. Many businesses that were shunned from the Chinese economy have found other markets.

The US dollar has resumed strengthening with solid economic data pushing Treasury yields higher, underpinning the currency. Most notably, CPI and PPI both came in higher than anticipated last week.

Several speakers from the Federal Reserve have maintained the hawkish mantra with some now pondering a return to 50 bp lifts at their March meeting rather than the 25 bp that the market has pencilled in. A return to outsized hikes by the Fed might lead to higher yields which might see the greenback gain traction.

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