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AUD USD Exchange Rate Extends Bullish Run on Protectionist US Talk

January 26, 2018 - Written by Ben Hughes

The Australian Dollar US Dollar (AUD/USD) exchange rate continued to extend its gains ahead of the weekend, still benefitting from the latest rhetoric from the Trump administration.

Even in the absence of any fresh domestic data the Australian Dollar capitalised on the relative weakness of its rival, with demand for higher-yielding assets still elevated.

Although concerns remain over the increasingly protectionist message of US officials this has not been enough to drive a significant deterioration in market risk appetite at this juncture.

Underwhelming US data also helped to weigh down the US Dollar on Friday morning, after December’s new home sales figure saw a sharp contraction of -9.3% on month.

Trade Concerns Support AUD USD Exchange Rate Gains



Fears over a potential trade war between the US and China have escalated in the wake of US comments at the World Economic Forum in Davos, adding to concerns over the outlook of the US economy.

An increasingly protectionist and belligerent approach to trade could weigh heavily on the domestic growth outlook, especially if the Trump administration’s tax reforms prove to be detrimental in nature.

This naturally limits the appeal of the US Dollar in the near term, with markets seeing less chance of the Federal Reserve opting to raise interest rates again any time soon.

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Even so, as analysts at Westpac noted:

‘The market response to protectionist comments this week from the Trump administration highlight that, amid a robust global economy, US protectionism is likely to be to the detriment of their currency. Further government shutdowns will also affect confidence negatively. That said, a weaker US dollar and December’s tax reform package loom as upside risks for inflation, growth and therefore the stance of monetary policy.’


If Fed policymakers take a more optimistic tone in the coming week this could encourage the AUD/USD exchange rate to return to a weaker footing.

However, as the odds of an imminent interest rate hike remain rather low the upside potential of the US Dollar is still likely to be somewhat limited.

This afternoon’s annualised gross domestic product data could offer USD exchange rates a rallying point, though, if the economy continues to demonstrate signs of robust growth.

Any downside surprise, on the other hand, may see the AUD/USD exchange rate extending its bullish run further before the close of the week.

Australian Dollar Exchange Rate Volatility Forecast on Fourth Quarter Inflation Data



Demand for the Australian Dollar was also supported by news that ratings agency S&P had affirmed Australia’s AAA credit rating on Thursday.

This encouraged greater confidence in the underlying health of the antipodean economy, although analysts at TDS took this with a pinch of caution, commenting:

‘Together with Australia’s AAA rating from Fitch and Moody’s, Australia continues to be one of only 10 countries that have a AAA credit rating with all three major ratings agencies. The only catch is S&P also affirmed its negative outlook, absent from S&P and Moody’s.’


The positive run of AUD exchange rates looks somewhat strained, however, as these recent bullishness has been largely driven by external factors rather than positive Australian data.

This leaves the Australian Dollar vulnerable to renewed downside pressure in the week ahead, especially with the release of the latest consumer price index data.

Any signs that inflationary pressure within the Australian economy is faltering could encourage investors to sell out of the antipodean currency once again.

Lacklustre inflation would give the Reserve Bank of Australia (RBA) further incentive to leave interest rates on hold, something which markets are unlikely to greet positively.

However, any upside surprise could drive additional AUD gains, particularly if the headline rate for the fourth quarter touches the RBA’s 2% target.

China’s manufacturing PMI for January could put further pressure on the Australian Dollar, with any loss of momentum within the Chinese economy boding ill for Australian exports.

Signs that demand for base metals from the world’s second largest economy is easing could encourage the AUD/USD exchange rate to slump on Wednesday.
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