Australian Dollar Forecast: Neutral

• The Australian dollar went south on US dollar resurgence.
• Commodities undermined the Australian dollar, but iron ore might run into issues.
• US yields are a focus ahead. What would a peak mean for AUD/USD?

The Australian dollar depreciated over the week as US dollar strength and commodity weakness dominated market focus. Interest rates have intermittently impacted the AUD/USD pair as yield spreads widened and narrowed, but it was rising US yields that lifted the US dollar across the board.

US CPI arrived on Wednesday and dominated the week after an ‘eye popping’ result saw headline annual CPI running at a 30-year high of 6.2% and core inflation at 4.6%. This led to Treasuries selling off as US yields screamed higher, underpinning the US dollar.

Risk assets sold off in the melee and this also weighed on AUD as commodity prices remained under pressure. Iron ore briefly traded under $82 per metric ton on the Dalian commodity exchange in China, a long way from the highs above $200 seen earlier in the year.

Iron ore could see prices below $80 per metric ton, but there is a point where marginal producers become unprofitable, and it may not be that far off. This could see a stabilization in prices once that situation becomes apparent.

Early in the week, the NAB business conditions and confidence data came in stronger than last month, as did the Westpac consumer confidence survey. The disappointment for the Aussie came via the jobs’ numbers on Thursday. The unemployment rate rose to 5.2% against the expected 4.8%. Employment fell by 46,300 versus the 50,000 that was anticipated to be added. The participation rate edged up to 64.7% from 64.5%.

It should be noted that the period covered for data was Sept. 26 to Oct. 9. This did not capture a significant proportion of the Australian population coming out of lockdown. Next month’s jobs data will be highly scrutinized for measures of how the economy is emerging from COVID-19 restrictions.

The week ahead sees RBA meeting minutes released, but we are unlikely to learn anything new from them. For AUD/USD, the main stage will be US yields, and if the Fed stays the course or verbalizes any change in monetary policy.

After the CPI release, San Francisco Federal Reserve Governor Mary Daly re-iterated the ‘transitory’ mantra on inflation. The market has priced in 2 hikes by this time next year and is challenging the Fed’s time frame for rate rises. It’s possible the market has got ahead itself in dumping fixed interest. This might hinder US yields going much higher and in turn, providing ongoing support for the US dollar. AUD/USD could be caught on the sidelines.

AUD/USD Against the US Dollar Index (DXY)

Chart created in TradingView