AUD/USD extends rally on strong Australian yields, soft US Dollar

• AUD/USD advances for a third consecutive day, trading around 0.7125 on Tuesday.
• Elevated Australian Bond yields and expectations of tighter monetary policy support the Australian Dollar.
• A softer US Dollar and strong Chinese trade data also provide support to the pair.

AUD/USD trades around 0.7125 on Tuesday at the time of writing, up 0.70% on the day and extending its gains for a third straight day. The pair is benefiting from a softer US Dollar (USD) and underlying support from expectations surrounding monetary policy in Australia.

The Australian Dollar (AUD) showed little reaction to the release of China’s Trade Balance data, which reported a surplus of $213.62B in February, well above market expectations of $179.6B and the previous reading of $114.1B. However, the surplus in Chinese Yuan terms fell sharply to CNY 1,500B, down from a revised CNY 808.55B previously and far below the market forecast of CNY 950B.

On the domestic front, Australian confidence indicators delivered mixed signals. The Westpac Consumer Confidence index rose by 1.2% in March, reversing two months of decline and marking its first increase since November. In contrast, the NAB Business Confidence index dropped to -1 in February from 4 previously, its first negative reading since April last year. Meanwhile, NAB Business Conditions remained steady at 7.

The Australian Dollar also finds support in rising Bond yields. Australia’s 10-year government Bond yield climbed to around 5%, its highest level since July 2011, amid escalating geopolitical tensions in the Middle East that are pushing energy prices higher and fueling inflation concerns. This backdrop could prompt the Reserve Bank of Australia (RBA) to adopt a more hawkish stance.

RBA Governor Michele Bullock said last week that the central bank is “very alert” to the potential impact of the conflict on inflation expectations and stands ready to raise interest rates if necessary.

Meanwhile, the US Dollar is retreating, helping support the pair’s upward momentum. The Greenback weakens as demand for safe-haven assets eases, with investors hoping for a quick resolution to the conflict with Iran. US President Donald Trump said the war with Iran could be resolved “very soon,” after several days of sharp volatility in Oil markets.

Investors are now awaiting key US inflation data due later in the week, including the Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) Price Index, which could provide fresh signals regarding the policy outlook of the Federal Reserve (Fed).

Several banks also highlight the recent resilience of the Australian Dollar. Analysts at Société Générale note that the currency has held firm despite rising Oil prices and point out that speculative long positions in AUD remain largely intact, supported by interest rate differentials that continue to move in Australia’s favor.

Meanwhile, economists at BBH believe the RBA could deliver another rate hike at its March 17 meeting, with markets currently pricing in about a 55% chance of a 25-basis-point increase.

Finally, ING points out that the AUD remains one of the best-performing high-beta currencies recently, supported by strong Australian export dynamics, improved terms of trade and stronger-than-expected Chinese trade data. The bank adds that a break above the yearly high near 0.7150 could open the door to further upside for the pair.