AUD / USD ignores disappointing US data as traders remain cautious ahead of FOMC

• AUD / USD managed to hit new yearly highs Wednesday morning at 0.75785, but has since reversed to 0.7560.
• Despite the low US retail sales figures, traders remain cautious ahead of the Fed’s monetary policy announcement at 19:00 GMT.
• The optimism of the US fiscal stimulus is likely.

He AUD/USD It managed to almost set new yearly highs in the European morning session of just under 0.7580, but the pair has since pulled back to trade at 0.7560. Currently, the pair is trading sideways on the day, in line with a subdued market sentiment in the US equity and crude oil markets (the S&P 500 is flat and the WTI is half a percent lower), amid the typical pre-FOMC caution.

AUD to remain supported as markets bet on US stimulus

Although stocks, crude oil markets, and currency markets are a bit hesitant ahead of the FOMC meeting later in the day, bond markets are betting that US Congressional leaders will soon be able to agree increased tax aid from Covid-19; US bond yields rose (10-year bond yield + 2bp on the day), the curve is steeper (the 2s / 10s spread increases 2bp), and equilibrium 10-year inflation expectations have risen by above 1.9% for the first time since May 2019, all in a sign that bond market participants are betting on 1) increased issuance of Treasury debt to finance the stimulus and 2) that the stimulus will increase the results of inflation over the next 10 years.

This “reflation” narrative is likely to keep risk assets like AUD underpinned, meaning there could be more gains in AUD / USD. Meanwhile, higher inflation expectations are likely to keep US real yields low (10-year TIPS yield is still below -1.0%), keeping the incentive to borrow money alive. in USD (and subsequently sell the dollar) in order to finance carry trades to higher-yielding assets (such as stocks or emerging market currencies).

While there is a risk that the Fed, which publishes its last monetary policy decision at 7:00 p.m. GMT, may disappoint some market participants who were expecting further monetary easing. The narratives outlined above are likely to cap any gains for the USD.

AUD / USD ignores US retail sales and the domestic evolution of the Australian dollar

Disappointing US retail sales numbers for November show that the US economy is suffering as a result of increased Covid-19 cases and associated economic restrictions; Top retail sales fell 1.1% (versus expectations for a 0.3% drop) and top retail sales fell 0.9% (versus expectations for a 0.1% increase), while the control group (who gives a better indication as to consumer spending within the quarter GDP report) fell 0.5%, worse than expectations for a 0.2% increase. Control group retail sales have now been negative for two months in a row; a third negative number in December will increase the risk that fourth quarter GDP growth in the US has been negative.

But the USD largely did not respond to the data and the AUD / USD pair barely moved. Indeed, the release of the US currency manipulation report, which was released at the same time as the US data, appeared to steal the limelight at the time. Australia was not mentioned in the report, but the US urged China to improve transparency in currency management, although this did not hurt CNH (or CNH-correlated currencies like AUD).

The AUD has also ignored the overnight news that numerous Australian coal-laden ships remain stranded off the coast of China, although Chinese officials have denied there is an official ban on Australian coal. Meanwhile, Australian Trade Minister Simon Birmingham will ask the World Trade Organization to intervene in his dispute with China over barley tariffs and apparently hopes other nations will get involved.