Australian Dollar Risks Wilting If Fed Remains Sanguine On Treasury Yields

The sentiment-linked Australian Dollar spent most of last week aiming higher following a fairly choppy period against the US Dollar. All eyes were and will likely continue being on elevated longer-term Treasury yields, where rates of return on the 10-year appear competitive compared to the dividend yield from the S&P 500. As bonds stabilized following softer core US CPI data, Wall Street regained upside momentum, along with AUD.

With that in mind, the focus turns to the Federal Reserve in the week ahead for its monetary policy announcement on Wednesday. Central banks from developed nations, like the RBA and ECB, have already expressed some caution about rising nominal bond yields, even taking action to cool markets. However, Fed Chair Jerome Powell, following commentary from the first week of March, appeared to be more sanguine.

Given the upside pressure, Treasury yields can experience amid the US$ 1.9 trillion Covid-relief bill, along with a large infrastructure package anticipated thereafter, global stock markets could continue seeing a rotation out of growth and into value equities. This can also pressure assets that are perceived to be relatively stretched, particularly tech ones, as the US could make all adults eligible for a Covid vaccine by early May.

So if the Fed continues to look past fears about rising longer-term rates, which also tends to reflect an improving medium-term economic outlook as inflation bets gain, then the Australian Dollar could weaken ahead. On the other hand, if the Federal Reserve appears to be watching bond markets more closely than currently expected, then the Aussie could accelerate its dominant upward trajectory since March 2020.

It should be noted that the Bank of England and Bank of Japan will also hold their latest interest rate announcements in the week ahead. Traders will likely be eyeing their views on the bond market as well. The importance of returns in fixed-income assets will thus likely overshadow domestic event risk for the Aussie, such as February’s Australian jobs report, due mere hours after the Fed.

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